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Dear Alex,
1 THE OECD has predicted that the China boom will continue to cushion Australia from the worst of a sharp downturn in the industrialised economies.
2. The Organisation of Economic Co-operation and Development(OECD) says economic growth should slow below 3 per cent in the next two years and bring inflation back within the Reserve Bank's 2-3 per cent target by the end of 2009 - a year earlier than expected by the central bank.
3. The RBA is forecasting inflation - now at a 16-year high of 4.25 per cent on an underlying basis - to fall back below 3 per cent by the end of 2010.
4. However, the OECD said in its latest economic outlook, the central bank would need to keep interest rates high to fend off rising inflationary expectations driving strong wage demands.
5. "Monetary conditions need to be kept tight until domestic demand and price pressures have moderated sufficiently," it said.
6. The RBA left its key cash rate at a 12-year high of 7.25 per cent for a third straight month on Tuesday.
7. For Australia, the OECD expects tight financial conditions to check household demand and stimulate saving, while a slowdown in corporate investment should be moderate, especially in the mining sector, which benefits from strong commodity prices.
8. "The impact of the appreciation of the Australian dollar on foreign trade and the weakening economic situation in the OECD should be cushioned in Australia's case by the persisting strength of the Chinese economy," it said.
9. The OECD welcomed the Rudd Government's "stabilising" fiscal policy.
10. It said the May budget cut revenues through income tax cuts while introducing a set of measures to slow spending growth with a stronger focus on infrastructure, climate change, education and health.
11. "This strategy should ease demand pressures to some extent," it said.
12. The OECD expects economic activity (in Australia) to slow to 2.9 per cent in 2008 and 2.7 per cent in 2009, after reaching 4 per cent in 2007.
http://www.theaustralian.news.com.au/story/0,25197,23812883-643,00.html
13. For your further comments and discussion, please.
14. Thank you.
Cheers,
Kenneth KOH