Friday, August 10, 2012

Reserve Bank backflips with optimistic growth forecasts

By Business editor Peter Ryan

The Reserve Bank has backflipped on its earlier cautious forecasts for the Australian economy after a raft of stronger than expected data in recent weeks.

The central bank now sees economic growth at 3.75 per cent by the end of year after earlier predictions of just 3 per cent.

The revisions are outlined in the RBA's quarterly statement on monetary policy released today.

"Information released over the past two months suggests that the Australian economy grew more rapidly over the past year than had been previously indicated by the available data," the statement said.

"Available data suggest that household consumption also grew strongly over the first half of 2012. Retail sales growth picked up in the March and June quarters to around its strongest pace in two years."

However, the RBA says various government payments made to households in May and June in relation to the carbon price "had a noticeable effect on sales at some retailers."

In a bullish statement, the RBA also notes "tentative signs" that the housing market and resident building sector may be starting to improve.

"There are signs that that residential activity might start to pick up in the second half of 2012. Lower interest rates, rising rental yields and population growth are likely to provide support for new housing construction."

The RBA says employment growth has increased "a little faster" in the first half of the year, mainly in the booming resources sector.

However, it confirms that job shedding has continued in the manufacturing, hospitality and building construction industries.

The RBA expects the officially jobless rate to remain at around 5.25 per cent, in line with yesterday's official reading for July of 5.2 per cent.

The central bank's forecast for headline inflation is little changed at 1.2 per cent before moving higher to peak at 3.5 per cent in June 2013.

The RBA says the increase reflects earlier volatility in fruit and vegetable prices and the carbon tax passing through to consumer prices. Treasury has previously forecast the carbon price to add 0.7 per cent to headline inflation.

The RBA has also warned that a persistently high Australian dollar - which surpassed 106 US cents yesterday - had the potential to derail structural reforms to the economy.

It points to a risk that "improvement in productivity growth is not sustained as assumed" and could "put upward pressure on inflation.

The RBA says the debt crisis in Europe is the single biggest threat to the global economy, although it is more optimistic about a resolution.

"The forecasts assume that financial market volatility will remain high but that a severe economic and financial disruption to the euro area will be avoided."

However, it says "an adverse shock" would hit commodity prices and reduce Australia's terms of trade by more than is currently forecast.

The statement also confirms this week's decision by the RBA that the cash rate "remained appropriate" for now.

Market economists believe that means further rate cuts in 2012 are unlikely.

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