Lloyds International: A global perspective on the local economy

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Lloyds chief economist on inflation, interest rates and the outlook for the Australian economy

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The Australian economy will continue to grow rapidly in 2011 buoyed by the continuing resources boom but is expected to slow in the second half of 2012 as monetary policy is tightened, according to Lloyds TSB Corporate Markets chief economist Trevor Williams.
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Visiting Australia last week, Mr Williams provided an upbeat perspective on the Australian economy, saying Australia’s growth prospects in the short term were assured given the continued rise of commodity prices. However it is this ongoing growth of commodity exports that will ultimately lead to a slowing of the Australian economy according to Mr Williams.
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“Australia is perfectly placed in that it satisfies the exact commodities that China is demanding – specifically coal and iron ore,” Mr Williams said.
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“The resources boom is driving down unemployment and pushing up wages. This scenario typically leads to higher inflation and historically when this happens, the Reserve Bank increases interest rates.
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“Given this context, we expect the cash rate to rise by another percentage point to 5.75 per cent by the end of the year and potentially hit 6.5 per cent next year.
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“This tightening of monetary policy will curtail consumer spending and increase the savings rate as households look to reduce debt, leading to a slowing of the economy in the second half of 2012.
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” While admitting forecasts were dependent on the impact of macro issues, Mr Williams was confident current global uncertainties would not have a lasting impact on the global economy.
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“While political instability in the Middle East continues, oil price itself isn’t enough to have any material impact on the global economy – unless there was a dramatic spike; the earthquake and subsequent effects may actually be the thing to jolt the Japanese economy out of recession given the forecast $200 billion in reconstruction investment; and China and emerging markets look set to continue being the growth engines of the global economy continuing to drive demand for commodities.”  Lloyds TSB Corporate Markets chief economist Trevor Williams
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Top 5 issues facing the Australian economy:

  1. Inflation: Will continue to rise due to growing economy fuelled by the resources boom
  2. Interest rates: To rise to 5.75 per cent by end of 2011
  3. House prices: Are beginning to slide (but not falling as much as expected due to lack of supply
  4. Australian Dollar: Driven up by the resources sector, making it difficult for other export sectors to compete – leading to an increased current account deficit
  5. Debt: High level of domestic debt

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