The OECD’s latest Economic Outlook provides a positive assessment of the Australian economy, with economic growth and employment forecast to improve and inflation expected to remain low.
The OECD forecasts Australia’s economy to grow by 3.7 per cent in 2004, accompanied by a rebalancing of aggregate demand from domestic to foreign sources. Growth is forecast to rise to 4 per cent in 2005. This performance, if realised, would make Australia one of the fastest growing economies in the OECD.
The OECD notes that “strong consumer confidence and a range of very positive business surveys point to continuing resilience in the domestic economy”. The OECD says that with the global economy recovering, and drought conditions easing, it expects an improvement in Australia’s economic growth. Business investment is expected to remain solid, underpinned by a stronger global environment, high capacity utilisation, favourable company profitability and low corporate gearing. The OECD expects the recovery in export growth and solid business investment to more than offset a cooling in the residential construction sector. On the back of a stronger external sector, the OECD expects the current account deficit to narrow to around 4.7 per cent of GDP by 2005.
The OECD noted the contribution of increased employment to Australia’s economic growth and forecasts an unemployment rate of 5.7 per cent in 2005. Inflation should remain within the Government’s 2 to 3 per cent target range, underpinned by the recent exchange rate appreciation, modest wage increases and a projected pick up in labour productivity.
The OECD highlights some downside risks to the Australian economy, including the possibilities that the global recovery could be weaker than expected, rainfall could be insufficient in rural areas, and the Australian dollar could appreciate further.
On fiscal policy, the OECD recognises the importance of keeping the Budget balanced over the economic cycle, and allowing fiscal policy to play a stabilisation role through the operation of automatic stabilisers. The OECD also argues that reform of the income support system should aim at strengthening the incentives of welfare recipients to participate in gainful employment.
The OECD notes that a firming but unbalanced global recovery is gathering pace, with substantial stimulus coming from macroeconomic policies. The OECD has slightly revised up its forecasts for GDP growth for 2003 in the OECD area from 1.9 per cent to 2.0 per cent, and has left the 2004 forecast unchanged at 3 per cent. The growth forecast for the OECD area in 2005 is 3.1 per cent.
An updated set of the Government’s economic forecasts will be released in the 2003-04 Mid-Year Economic and Fiscal Outlook.