Booming economy not good news for rates
BUDGET 2011 – SPECIAL REPORT: A mining boom that helps lift economic growth to four per cent and push the jobless rate below five per cent should be good news for Australia.
A mining boom that helps lift economic growth to four per cent and push the jobless rate below five per cent should be good news for Australia.
But the downside is likely higher inflation and the prospect of further interest rate hikes sooner rather than later.
The 2011/12 budget papers, released on Tuesday, showed the Department of Treasury has forecast real gross domestic product (GDP) to expand by four per cent in 2011/12 and 3.75 per cent in 2012/13.
The unemployment rate was predicted to sit at 4.75 per cent in the June quarter of 2012, before falling to 4.5 per cent a year later.
A falling unemployment rate means there is more competition by employers for staff, which pushes up wages and puts pressure on inflation.
"Wages growth returned to trend in 2010, and is expected to increase as the labour market tightens," the budget papers said.
Higher incomes, an improving terms of trade courtesy of the mining boom and a more positive outlook for the major developed economies was expected to put added pressure on inflation.
Treasury forecasts in the budget papers showed the consumer price index (CPI) inflation was tipped to sit near the top of the Reserve Bank of Australia’s (RBA) two-to-three-per-cent target band.
The CPI was expected to rise by 3.25 per cent in 2010/11 and by 2.75 per cent in 2011/12, before increasing by three per cent in through-the-year terms in 2012/13.
The cash rate has sat at 4.75 per cent since Melbourne Cup day in November last year, when the central bank announced a quarter of a percentage point rate hike.
While the RBA has kept its powder dry since, some economists have predicted the central bank would pull the trigger and raise the cash rate as soon as next month.
Meanwhile, others were tipping two rate rises over the rest of calendar 2011.
Treasurer Wayne Swan said the mining boom would continue to drive Australia’s growth, helped by expanding Asian economies, but would also put pressure on inflation.
"This historic investment boom will stretch our economy’s capacity over the coming years – it will test the capacity of the work force and put added pressure on wages and prices," Mr Swan said in a statement on Tuesday.
"High prices for Australia’s key commodity exports underpin a record investment pipeline in the resources sector.
"The mining industry is planning to invest $76 billion in 2011/12 – around eight times the annual level of the preceding boom."
However, Mr Swan said returning the budget to surplus by 2012/13 would help ease pressure on interest rates.