Slow recovery from GST-inspired downturn

WHILE Australia may have avoided a technical recession by the skin of its teeth recently, the recovery rate of the economy is nothing to get excited about.

The influence of the GST and international markets makes it difficult to predict how fast the economy will recover. But it appears any growth will be a lot slower in the next 18 months than what the markets experienced in the first half of last year. In the December 2000 quarter there was an end to a remarkable period of growth. Up until September last year the economy was growing at 4.9 per cent, but it dropped significantly, with December’s annual growth figures showing 2.1 per cent.

Having avoided the recession, in the March 2001 quarter there was growth of 1.1 per cent. Currently, it appears as though consumer spending will drive the growth, as business investment spending is still weak. Interestingly, last year’s economic downturn can almost entirely be attributed to the effects of the introduction of the GST on the housing sector.

Aside from the economic impact of the GST, recent concern has centred around the fall of the Australian dollar against the US currency.

Our view of the dollar is that its longer-term valuation depends upon relative inflation rates and cyclical factors such as commodity prices and interest rates. In other words, over the long run, the dollar is valued on its underlying economic fundamentals as opposed to valuations derived from current equity valuations and investment funds movements. The performance of the largest national economies could determine the immediate outcomes for the international economy and Australia

Key among the larger economies in the next 18 months is the performance of the US and Japan. The US and Japan are tipped to grow at 1.5 and 0.6 per cent respectively, while the IMF has forecast global economic growth at 3.2 per cent (down from 5 per cent in 2000), which would benefit developing countries such as China, as well as Australia.

The outlook for WA is slightly grimmer than the rest of the nation. The decline of business investment has affected WA’s economy quite markedly in the second half of 2000 and current market indicators, such as the unemployment rate, put us behind the rest of Australia.

However, WA’s economy could get a boost, with the mining industry set to begin development of several big-ticket items.

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