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Economy recovering as election looms

DENNIS Mahoney is the chief economist for the BNP Paribas Group. His is an opinion that is well respected and highly regarded, particularly by this columnist. With this in mind, I approached him to obtain his outlook for the Australian economy and our place in the world economy.

The latest Australian inflation figures appear, on the surface, to be bad. But there are some very good reasons and explanations for this. Are the figures bad?

A) Yes, in that higher inflation isn’t something any borrower likes because it means the Reserve Bank won’t lower interest rates any further. Indeed, by this time next year, rates could be up half to 1 per cent. But the rise in inflation is also inevitable in the sense that it is coming from higher import prices, which themselves are coming (finally) from the weak Australian dollar. The fact that the Australian dollar has stopped falling and is starting to improve suggests that inflation will be lower next year – but not low enough to stop the Reserve Bank raising rates to restrain what should be a pretty healthy upswing in the economy.

The Prime Minister has to go to an election towards the end of this year. What state will the economy be in when he does decide to call the election?

A) The economy will well and truly be in recovery mode. That will help the PM’s re-election chances but, more importantly, start to create more jobs for Australians.

The US economy appears to be dictating the odds in so far as the likelihood of a global recession. Will Alan Greenspan, the chairman of the Fed, allow the US to go to a full-blown recession?

A) I think he is doing all he can to prevent one, by cutting the Fed’s funds rate aggressively. I don’t think we face global recession in 2002, but the recovery from the trough this year could be pretty modest.

There are murmurs of discontent around the Argentinean and other emerging economies. In the past, we have seen Greenspan cut rates in the US to forestall any fallout from other regions, as he did during the Russian debt crisis. Is he likely to do the same now and is there potential for further fallout from the South American region?

A) I don’t think so. Greenspan cut rates in the Russian crisis as much for fear that some US financial institutions would fall over and have serious effects on the US financial system. Argentina’s problems stem in part from locking itself in to the US dollar and, with the US dollar so expensive, Argentineans can’t compete internationally. That is their problem, not the globe’s, since most countries have depreciated a long way against the greenback, not least Australia.

Will the Australian economy continue to display the slight improvement that we are starting to see in the more recent batch of economic data?

A) Definitely, and the slight improvement you note will become substantial before the year is out – in housing, non-residential construc-tion and household spending.

The Australian dollar has suffered greatly during the past two years. Are you forecasting any improvement in the dollar over the next 12 months or is it going to be more of the same?

A) Both. It will be more of the same until the global economic outlook starts to brighten and commodity prices start to lift. That is likely by end-year or early 2002. But watch the US economy for the earliest signs of recovery, however modest. That is the key. By early 2002 it should be on the mend, taking global growth with it and the $A. One caveat: the US is so strong it is heading for a fall, but no one can tell just when. If it stays strong, the gains of the $A might be quite limited. If the US dollar falls, it could do so quite dramatically, in which case the $A/$US rate could quickly get back to 60 cents (rather than end-2002 as is my present “forecast”).

Unemployment in Australia appears to be on the way up. Is this the case or are you forecasting any improvement herein?

A) Unemployment lags economic activity so the unemployment rate will probably keep rising until September or October but it will stop rising before the election (if in November as I expect) and be heading down by early 2002.

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