Australia’s economic future will be challenged by an under-supply of capacity and housing, despite decades of economic reform shielding Australia from the worst of the global downturn, the Reserve Bank of Australia (RBA) says.

The nation is entering a new phase of economic expansion with less spare capacity than was thought likely, with unemployment appearing to have peaked at around 5.8 per cent, RBA assistant governor (economics) Philip Lowe says.

“The issues we face are, therefore, quite different from those confronting most of the other advanced economies,” Dr Lowe told the Urban Development Institute of Australia National Congress on Wednesday.

“Elsewhere, the challenge is to get private demand to grow on a sustainable basis so that it can catch up with the supply potential of the economy.
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The Reserve Bank must be careful not to choke off economic recovery with another rate rise, says Queensland Treasurer Andrew Fraser.

Economists are tipping a rise in the cash rate when the Reserve Bank board meets next week.

Mr Fraser says that while the recovery is under way, confidence remains fragile.

“I think the Reserve Bank’s got a really hard road to hoe this year,” Mr Fraser told AAP.

“They’ve got to be careful not to choke off the recovery.

“We can’t overplay the strength of the recovery.
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Demand for new workers rose sharply last month in a vote of confidence in the economic recovery from the business community.

While this won’t stop the jobless rate rising further in the near term, the recent strength of job advertising does suggest the peak will probably be shy of the 6.75 per cent predicted by the government, economists say.

However, the construction sector - a major employer - remains fragile and won’t be helped by recent interest rate rises.

The ANZ job advertisement series - a key pointer to future employment growth - rose 5.2 per cent in November compared to the previous month, and now stands 12.3 per cent higher than the low recorded in July.

ANZ acting chief economist Warren Hogan said the improvement in job advertising would eventually translate into higher employment growth.
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Business confidence has soared to its highest level since October 2003 - a time when the economy had yet to feel the full impact of the mining boom and few had heard of a subprime mortgage.

The federal government was quick to claim credit for the lift in confidence through its economic stimulus packages, saying it was not time to wind back the measures.

It also rejected suggestions that the pump-priming measures were putting pressure on interest rates.

The National Australia Bank (NAB) business survey released on Tuesday showed its confidence index jumped a further eight points in August, for a total gain of 50 points since January.

At the same time, the latest Dun and Bradstreet business expectations survey found 46 per cent of respondents had forecast their sales would increase in the December quarter.
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By Jill Fraser for Lending Central

Headline seekers and false prophets dominate the forecasting business so Lending Central sought the opinion of consistently rational thinkers Saul Eslake, formerly ANZ’s chief economist and now director of the Grattan Institute’s Productivity Growth Program, Dr Shane Oliver AMP Capital Investors’ chief economist, Professor Fariborz Moshirian from the University of New South Wales’ School of Banking and Finance and Morgan Stanley’s Gerard Minack.

Opinion pieces by Saul Eslake and Dr Shane Oliver follow. Comments by Gerard Minack and Professor Fariborz Moshirian will come in the following days.
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Australia’s recovery from the economic downturn will be tough, with rising interest rates and high prices essentials, but the nation’s economy will emerge stronger, Prime Minister Kevin Rudd says.

Mr Rudd has warned the government will have to make some tough budget decisions as the economy recovers in an essay published in The Sydney Morning Herald on Saturday.

“Australia is performing better than most other economies, with the fastest growth, the second-lowest unemployment and the lowest debt and deficit of all the major advanced economies,” Mr Rudd writes.

“And we remain the only advanced economy not to have gone into recession.
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The federal government has warned that the economy still faces a rough ride, even though another rise in the jobless rate was more moderate than experts had predicted.

The unemployment rate struck a six-year high of 5.8 per cent in June data released on Thursday, rising one notch from the 5.7 per cent posted in May.

This was slightly less than the 5.9 per cent predicted by economists.

Still, there was a solid 21,400 drop in the total number of people employed in the month.

The total number of jobs lost in May was also revised to 8,500, up from an originally reported 1,700.
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If history is any guide, Australia’s recovery from recession will be characterised by the same contradictory signals that accompanied the downturn.

There will be sectors and regions heading in different directions.

As housing recovers in response to pent-up demand and improving financial conditions, engineering construction will flag under the weight of the deflated minerals boom.

As the mining boom states of the north and west wilt, the south-east of the country will be aided by federal infrastructure spending.
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A recovery in the housing sector is expected in the second half of 2009, thanks to low interest rates and government stimulus spending, a peak industry group says.

The Housing Industry Association’s (HIA) quarterly National Outlook forecasts new home starts will fall by 17 per cent to a total of 132,000 for the year to June 30.

However, the report, released on Thursday, predicts a rise of 11 per cent in housing starts for the following 12 months.

The HIA expected 129,500 dwellings to be completed in fiscal 2009 compared with 141,100 in 2008 and says it will take until 2011 before the 2008 level is reached again.
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Treasurer Wayne Swan says Australia’s recovery will be faster than international forecasts predict.

He’s rejected suggestions by the International Monetary Fund (IMF) that recovery will be slow.

“No, absolutely not,” he told ABC Radio.

“We are in extraordinary times. We are in the middle of global recession. The forecasts do need to reflect that.”
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