The Reserve Bank of Australia has maintained its strong growth expectations for the next year, but says in its latest quarterly economist statement that much of that growth will depend on how the mining sector continues to recover.
The statement also suggests it will hold off on any more interest rate rises until economic conditions turn.
The RBA expects growth of 3% for the year to June 2010, while growth of 3.75% is expected by June 2011 and 4% by the end of 2012.
CPI inflation will be at 3.1% for June 2010, and will reach 3.25% throughout June 2011 to reach 3% by June 2012.
Underlying inflation will come to 2.75% by the end of the year, and will remain there until June 2012 when it will reach 3%. This data comes after recent figures which showed June quarter inflation was kept within the 2-3% target band.
The RBA has also revised its forecast for the terms of trade, saying it now expects terms to remain at historically high levels, although they will ease more rapidly.
The bank said the economy is recovering solidly, but there are still risks, considering that “fiscal policy will be subtracting from growth in the period ahead”.
“Given the uncertainty about the timing of a number of planned large investment projects in the resource sector, it is possible overall growth over the next few quarters will be weaker than in the central forecast.”
However, it also said private domestic demand could be stronger than expected with several mining firms attempting to push through major investments.
“On the upside, it is possible that private domestic demand could be stronger than currently expected, with firms in the mining sector attempting to push ahead with investment more rapidly than assumed.”
“In addition, it is possible that the current cautiousness in spending by households may not persist, particularly if the unemployment rate continues to decline. There is also a risk that growth in the global economy surprises on the upside, as it has done over much of the past year.”
“Investment in the mining sector, which is already at high levels, is expected to increase further, particularly in the LNG and iron ore sectors. Survey-based measures of capacity utilisation and business conditions are at, or slightly above, average levels and corporate balance sheets are generally in sound shape.”
However, the RBA also says business credit growth remains subdued and conditions are still difficult for small businesses.
“In contrast, business credit growth remains subdued and credit conditions are still difficult for some firms, particularly small businesses and those in the property industry, with commercial construction at quite low levels.”
Due to strong economic conditions, growth close to trend and inflation within the 2-3% range, the RBA said it “views the current setting of the cash rate as appropriate at this stage”.
Construction activity declines in July
The Australian construction sector contracted during July due to tough conditions in the commercial and engineering sectors, according to the latest figures from the Australian Industry Group-Housing Industry Association.
The construction index dropped 3.1 points to 43.3, a 12 month low, which is well below the 50-point level separating expansion from construction.
“This, together with the dampening impacts on the construction industry of the continued unwinding of public sector spending and higher interest rates, is slowing the momentum of recovery in the broader economy,” AIG director of public policy Peter Burn said in a statement.
The Australian sharemarket has opened lower following a disappointing night on Wall Street overnight where investors were shocked to discover jobless claims have risen yet again.
The benchmark S&P/ASX200 index was down 10 points or 0.24% to 4555.6 at 12.20 AEST, while the Australian dollar gained slightly to US91c.
AMP shares lost 0.2% to $5.41, with Commonwealth Bank shares losing 1.2% to $52.34. Westpac fell 1.4% to $23.52, while NAB lost 1.3% to $24.85.
Australian Competition and Consumer Commission chairman Graeme Samuel has said he is concerned about the “whirlwind of innuendo” regarding NAB’s proposed takeover of AXA Asia Pacific.
Samuel told The Australian that “the ACCC’s processes are being targeted for potential manipulation through innuendo and background briefing.”
AXA entered a trading halt yesterday, after reports emerged suggesting ACCC had probed for more information about the proposed plan.
Whitehaven Coal shares up following discussion rumours
Whitehaven Coal shares have grown over 5% to $6.07 after the company said it is discussing talks with a third party about a possible deal. However, the managing director Tony Haggarty has told Reuters the discussions won’t necessarily amount to anything.
“You shouldn’t assume anything in that regard,” he said. “This is pure speculation on the part of the press. We’re always in talks.”
“Those discussions that are continuing are preliminary and remain incomplete,” the company said in a statement. “And it is highly uncertain whether they will lead to a proposal for consideration by the company’s directors and shareholders,” the company said in its statement.
Investors were given some relief overnight when BP made significant progress in plugging the Gulf of Mexico oil spill. However, jobless data negated any benefit from the news.
The official data showed initial claims for jobless benefits rose to 479,000, the highest level since early April. The news sent the Dow Jones Industrial Average down 5 points or 0.05% to 10,647.98.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
