Rates rise back on the agenda - The Age - 5-6-08
HIGHER interest rates could still be on the horizon, with households continuing to spend nearly every cent earned, and Australia's economy remaining strong despite growing at a slower pace.
The March quarter national accounts showed annual growth slowed from 4.3% to 3.6%, with the nation's gross domestic product growing by 0.6% in the quarter.
Despite it being the slowest pace in almost two years, it was double most forecasts.
Financial markets are now pricing in a 50:50 chance of an interest rate rise by the end of the year, and possibly as soon as August if inflation figures to be released on July 23 are worse than expected.
The Federal Government used the figures to attack the Opposition over its plans to block elements of the budget, such as tax rises on luxury cars and premixed drinks, saying this would worsen inflation and push up interest rates.
The OECD last night backed Treasury's forecasts of a soft landing for the Australian economy. In its latest Economic Outlook, it predicted growth in Australia to slow to 2.9% this year and 2.7% next year. Inflation would decline to 3.1% next year while unemployment edged up to average 4.7%. The OECD predicts the US will avoid recession, but face two years of low growth. Japan and Europe would do only slightly better. But by the end of next year, all three would be picking up speed.
The OECD also warns that Australia faces "a significant negative risk" that the world economy will slow more than it has forecast, driving down the export prices that underpin Australia's growth. It nonetheless endorses the Government's budget tightening as appropriate, saying it "should ease demand pressure to some extent".
Prime Minister Kevin Rudd yesterday repeated warnings about being in the initial stages of a "15-round fight" against inflation.
Acting Treasurer Lindsay Tanner said the Opposition's planned "smash-and-grab raid" on the surplus was "totally irresponsible".
"The last thing you should do in the current economic circumstances in Australia is loosen the fiscal settings, slash the surplus and pump more money into the economy," Mr Tanner said.
The national accounts figures show that resource-rich states Western Australia and Queensland continued to power ahead, in comparison to Victoria and NSW.
Net exports (difference between imports and exports) wiped 0.7 percentage points off GDP. But all areas of consumption - household, businesses and government - remained strong.
The areas where consumers pulled back were in the use of vehicles, as a result of higher petrol prices, and spending at cafes and restaurants.
Business investment rose 1.6% in the quarter. Corporate profits also remained strong, with surging coal and iron ore prices expected to ensure higher profits.
Economists say that with strong income growth and tax cuts on the way, it will be harder to cool growth. "We doubt the current level of interest rates, which remain roughly 'neutral' in real terms, will be enough to fight these powerful forces," ANZ economists said in a report, predicting there would be possibly another two rate rises this year.
