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June, 2018 7:47 AM



Aust economy ready for liftoff, apparently

Aust economy ready for liftoff, apparently

There are signs the economy will finally start firing on all cylinders after a period of underperforming which has left growth well below three per cent.

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By AAP 31.05.2018 01:27 PM

Malcolm Turnbull loves to talk about the 400,000 jobs that were created last year and Australia's strong economy at every opportunity.

Perhaps the prime minister thinks if he keeps saying the latter enough it will happen because in recent times economic growth has been fairly hit and miss.

It's not that the economy is necessarily weak, it just hasn't been unable to fire on all cylinders for a sustained period.

The economy slowed to an annual growth rate of 2.4 per cent by the end of 2017, unable to sustain a lift to what economists call the 'long-term trend', which is now put at 2.7 per cent.

The last time the economy showed a continuous period above a three per cent rate was in late 2015 and into the first six months of 2016.

Since then, there has been a variety of hiccups, such as weather-related closures of ports and mines stalling the flow of exports, which resulted in a rare contraction in the economy in one quarter.

But now there are signs Turnbull's wish may be coming true.

Treasury, the Reserve Bank, the International Monetary Fund and the Organisation for Economic Cooperation and Development are all forecasting Australian economic growth of around three per cent over the next few years.

Surely, they can't all be wrong.

Treasury boss John Fraser told a Senate hearing this week Australia is being supported by a global economy that is enjoying its fastest pace of growth since 2011.

Business conditions are also at a record high, with non-mining business investment now making a solid contribution to growth while the drag from the end of mining investment boom has finally run its course.

"The strength in non-mining business investment growth should more than make up for relatively flat housing construction activity expected in coming years," Fraser said.

Even then, housing construction is expected to remain at an elevated level.

In its latest Economic Outlook released this week, the OECD expects government investment in roads and other infrastructure projects will support growth.

At the same time, Australian exports will also boost the expansion, especially as the greater capacity in the mining sector through billions of dollars of investment comes on stream.

A strong economy should help to underpin employment growth, even if it is not sustained at last year's record pace.

Both Treasury and the OECD expect the strength of the jobs market should lead to a pick-up in wages growth.

"Companies are now reporting that the biggest problem constraining the growth in their business is difficulty finding suitable labour," Fraser told the hearing.

"With all these positives, what could possibly go wrong?

The volatility in global financial markets this week shows that sentiment can turn on a dime.

Political uncertainty in Italy as it struggles to form a government sent renewed shock waves through the Eurozone, a bloc that is already dealing with Britain's exit from the European Union and a global economy which is threatened by a trade war.

Closer to home, the OECD warned the slowdown and rebalancing of the Chinese economy and its impact on commodity prices could have a larger drag on Australian growth than expected.

It also pointed to another risk from the high indebtedness of households.

In particular, it said a large fall in house prices would reduce household wealth and spending while damaging the construction sector.

In the meantime, the national accounts - a comprehensive guide to how the economy is performing - are released next week.

Economists are expecting a solid result for the first three months of the year, with a quarterly pace of growth at around 0.8 per cent, double the outcome of the December quarter.

That would see the annual rate rise to 2.7 per cent and on course for that elusive three per cent pace - something Turnbull can realistically crow about if forecasters are right.

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