Mining boom to continue Australian economic growth: OECD

OECD predicts growth will come despite sharp sectoral disparities within the Australian economy

The OECD has delivered a positive outlook for Australia during the next two years, predicting the country will continue to continue reading the benefits of the mining boom.

Delivering the verdict in its current OECD Economic Outlook report, which provides twice-yearly analysis of the major economic trends and prospects for the next two years, the international economic body said growth would come despite sharp sectoral disparities within the Australian economy.

“Mining expansion will continue, but some other sectors are having to adjust to the high level of the exchange rate and raise their productivity, which can be expected to weight on the labour market,” the report reads. “Faster fiscal consolidation will also weigh somewhat on demand.”

The OECD also viewed moves by the federal government to restore fiscal leeway while macroeconomic conditions were still favourable and terms of trade still high, positively, but suggested the government move away from supporting Australia’s beleaguered manufacturing industry.

“In the absence of inflationary pressures, the accommodating monetary stance which accompanies this budget-tightening should help limit the risk of weakening employment,” the report reads.

“The authorities should preserve the economy’s flexibility and facilitate the adjustments made necessary by the changes underway, rather than impeding those changes by, for example, subsiding certain sectors.”

The report also noted that economic activity grew about two per cent in 2011, largely driven by the mining sector, but in 2012 growth was being affected by a persistently high exchange rate, cautious consumption and investment behaviour of households since the global financial crisis and continued fiscal consolidation in a number of sectors.

“Despite an unemployment rate stable at around 5 per cent at the beginning of 2012, employment growth slowed substantially in the non-mining states. Thanks in particular to lower import prices, core inflation has weakened to 2 per cent in early 2012.”

Looking at Australian economic growth potential in 2012 and 2013, the OECD said sustained exports and mining sector investments could result in growth reaching 3 per cent in 2012 and 3.75 per cent in 2013.

“Activity will nonetheless remain modest in numerous sectors that are being compelled to make productivity-raising efforts to adjust to the high level of the Australian dollar. The negative impact of those adjustments on employment should however be limited by the easier monetary conditions.

“With unemployment running at 5.5 to 5.75 per cent and a still negative output gap, inflation can be expected to remain low, at 2.5 to 2.75 per cent, even when the introduction of a carbon price in July 2012 is factored in”

Turning to risks to the Australian economy, the report noted the sovereign debt crisis in Europe and a sharper-than-expected economic slowdown in China as being likely to result in adverse terms-of-trade.

“The structural adjustments currently underway are also generating substantial uncertainties that could weigh in unemployment, confidence and growth, with potential negative spillovers on house prices,” the report reads.

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