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    BIS Shrapnel reports that Australia is setting up for strong growth period but with higher interest rates

    BIS Shrapnel

    According to economic forecaster and industry analyst BIS Shrapnel , the Australian economy is on the verge of a major cyclic upswing. Over the next two years growth will pick up speed and build into a boom later this decade, driven by rolling investment cycles.

    BIS Shrapnel’s Long Term Forecasts, February 2010 Update reports the economy currently has enough extra capacity and slack in the labour markets to cater for the initial phase of the upswing without exciting demand or cost-side pressures. However, the forecaster warns that problems may occur in three-to-four years’ time when all the major construction cycles synchronise and inflationary pressures resurface, leading to higher interest rates.

    BIS Shrapnel was one of the few forecasters who consistently predicted in the first six months of last year that Australia would not suffer a recession.

    Richard Robinson, report author and senior economist at BIS Shrapnel explained, “We are now well and truly into recovery from what turned out to be a modest downturn – and not a recession as other forecasters predicted at this time last year. But it’s now time to look forward not backward. We’re into a rebuild phase, rather than a rebound.

    “Two years is a long time in investment markets. I know the Global Financial Crisis (GFC) is still front of mind, but it won’t take long before we forget,” he added. “Remember the ‘disastrous’ sharemarket crash of October 1987, which was quickly followed by the property boom of 1989, which preceded the recession ‘we had to have’. The build up this time will be slower, but it’s the current caution in risk adverse debt and equity markets that is setting us up for the stock and capacity shortages that will underwrite the next boom later this decade.”

    Initially, the housing upswing will become the key driver of growth.

    “Investment, and particularly the construction side of it, is the primary driver of growth in the economy. The next phase of investment will underwrite growth in the economy, but the timing and logic of each construction cycle is different, with varying knock-on effects to different sectors and across the states,” says Robinson.

    Public sector investment is currently the strongest of the investment sectors, offsetting further declines in business investment over 2010, but will activity peak this year. It is likely that the schools program has already peaked, while health-related construction is still increasing, and the social housing program is behind schedule.

    The infrastructure works under the ‘Nation Building’ program will accelerate this year, but this will only partly replace a number of large state-funded projects that are finishing soon. After 2010, BIS forecasts public investment will decline as the Federal and State governments attempt to rein in their deficits, but the real cuts to government expenditure won’t occur until after the Federal election due later this year.

    BIS Shrapnel expects the next round of mining projects to get underway next year, with the return in commodity prices and a more positive outlook for the global economy providing the impetus. Plant and equipment investment should also pick up later this year, as businesses, becoming confident about the outlook and able to access finance, take advantage of the high Australian dollar to buy cheap imported equipment.

    Further information regarding Long Term Forecasts, February 2010 Update can be obtained from BIS Shrapnel.

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