Australia to extend 13 years of expansion: OECD

The Australian economy can expect continued strong growth over the next two years and a narrowing current account deficit, but there is a risk of higher consumer prices, the OECD said in a report on Thursday. The Organisation for Economic Co-operation and Development said in an economic survey of Australia that it expects Australian economic growth of around 3.75 percent per year over the next two years, extending 13 years of expansion.
It also forecast further gains in employment would encourage higher labour force participation, keeping unemployment at its low level. Australia's unemployment rate fell to a 28-year low of 5.1 percent in December.
The OECD said inflation was likely to stay within the central bank's 2 to 3 percent target band in the face of high capacity utilisation and low unemployment, as wage gains remain moderate, productivity gains are solid, and the cooling of the housing market dampens private consumption demand.
However: "While the strength of domestic demand and firming labour market conditions have not so far generated systemic inflationary pressures, there is a risk of higher consumer price inflation once the effect of the earlier currency appreciation diminishes," the OECD said. The fourth-quarter 2004 Consumer Price Index unexpectedly recorded annual inflation above the centre of the central bank's target band, raising market speculation that the Reserve Bank of Australia will tighten rates in the next few months.
The OECD said it expects the current account deficit to narrow to 4.5 percent of gross domestic product by 2006. "With the international economy picking up, the impact of the drought waning, and the housing cycle turning around, there should less reliance on domestic demand and a smaller drag from net exports," it said.
"The stubbornly large external deficit and high foreign indebtedness might give rise for concern, though this should not be a major one given that the counterpart to the deficit is foreign investment, rather than private consumption."
The OECD put foreign debt at about 48 percent of GDP.
In third-quarter 2004, the current account deficit was a record A$13.7 billion ($10.7 billion) or 6.5 percent of GDP, and economists expect another large deficit in the fourth quarter.
The OECD said public finances are expected to remain healthy, but household indebtedness is expected to remain high.
However, it said there is no guarantee Australia's impressive economic performance will continue as it has been, even though the major reforms in labour and product markets implemented since the late 1980s may be felt for some years to come.