My employer recently asked me to write a few paragraphs on where I thought the economy is headed over the next 12-18 months.
This is what I gave them.
MB
* * * * *
The economic outlook for the next 12-18 months
The economy is reaching arguably the most delicate point seen in years.
Many domestic factors are encouraging: recent jobs and GDP growth have been solid, CPI is in check and our exchange rate appears to have stabilised. There is, however, increasing concern over the "asset price boom" and leverage of households (comments made by both the RBA and Treasury). Further, there remains uncertainty over the state of the US economy and other major trading partners (eg. Japan), not to mention the continued spectre of terrorism from which international and domestic tourist numbers have never fully recovered.
To make matters even more uncertain we are in an election year, and this will only complicate the setting of both monetary and fiscal policy in the coming months.
Were it not for the current property boom it seems highly likely that interest rates would have fallen this year in response to weakened domestic factors (namely CPI). As it is, monetary policy appears to have shifted away from primarily a CPI focus to also include asset prices.
BIS Shrapnel recently forecast that within 3 years interest rates would exceed 10% and prove the catalyst for a sharper downturn and bigger recession than was experienced in 1991. At this stage such predictions appear premature as there currently exists neither the economic basis, nor political will, for double-digit interest rates within the foreseeable future.
However, it now seems certain that we are at the beginning of a period of a tightening of monetary policy (over at least the next 6-12 months). During this period, and if the forecasts prove accurate, economic growth will be steady (between 3 and 4%) and there will be a slight fall in CPI (to between 2 and 2.5%).
Further movements in interest rates beyond this will largely be dependent upon CPI factors and the reaction of homebuyers and investors to the initial tightening, particularly within the two main geographic markets (Sydney and Melbourne). It is also possible that some resources will be diverted away from real estate and into equities if the All Ordinaries continues to perform well, thus relieving some of the pressure on property prices.
Exogenous factors such as terrorism, oil prices and the US economy remain major variables with implications and effects for the Australian economy that cannot be easily or reliably forecast.
This is what I gave them.
MB
* * * * *
The economic outlook for the next 12-18 months
The economy is reaching arguably the most delicate point seen in years.
Many domestic factors are encouraging: recent jobs and GDP growth have been solid, CPI is in check and our exchange rate appears to have stabilised. There is, however, increasing concern over the "asset price boom" and leverage of households (comments made by both the RBA and Treasury). Further, there remains uncertainty over the state of the US economy and other major trading partners (eg. Japan), not to mention the continued spectre of terrorism from which international and domestic tourist numbers have never fully recovered.
To make matters even more uncertain we are in an election year, and this will only complicate the setting of both monetary and fiscal policy in the coming months.
Were it not for the current property boom it seems highly likely that interest rates would have fallen this year in response to weakened domestic factors (namely CPI). As it is, monetary policy appears to have shifted away from primarily a CPI focus to also include asset prices.
BIS Shrapnel recently forecast that within 3 years interest rates would exceed 10% and prove the catalyst for a sharper downturn and bigger recession than was experienced in 1991. At this stage such predictions appear premature as there currently exists neither the economic basis, nor political will, for double-digit interest rates within the foreseeable future.
However, it now seems certain that we are at the beginning of a period of a tightening of monetary policy (over at least the next 6-12 months). During this period, and if the forecasts prove accurate, economic growth will be steady (between 3 and 4%) and there will be a slight fall in CPI (to between 2 and 2.5%).
Further movements in interest rates beyond this will largely be dependent upon CPI factors and the reaction of homebuyers and investors to the initial tightening, particularly within the two main geographic markets (Sydney and Melbourne). It is also possible that some resources will be diverted away from real estate and into equities if the All Ordinaries continues to perform well, thus relieving some of the pressure on property prices.
Exogenous factors such as terrorism, oil prices and the US economy remain major variables with implications and effects for the Australian economy that cannot be easily or reliably forecast.
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