The Booming Australian Economy

Charlie Nelson
director foreseechange
April 2002

These forecasts are based on volume (real, or inflation adjusted) spending.

 

Household consumption expenditure growth slowed dramatically in 2000 and especially in the December 2000 quarter, but has recovered since.  A number of factors were associated with the slowdown, including the combined impacts of the GST package and higher interest rates on housing and household goods; higher petrol prices curbing discretionary income; and a temporary increase in household saving following the introduction of the GST package.  The forecast strong growth recovery in late 2002 is due to the lagged impact of rate cuts in 2001.

 

Chart 1


 


GDP growth collapsed in late 2000 as the housing industry suffered a double whammy of higher interest rates and a lull after the GST package related bringforward of construction (Chart 2).  The panic reversal in 2001 of the 2000 rate rises, combined with the extension of the first home owners grant has caused another housing boom. The booming economy will quickly turn down if the Reserve Bank is too aggressive in raising interest rates.  Household debt has ballooned in the past 10 years and some consumers are very interest rate sensitive.

Growth in business investment is expected to takeover from housing during 2002 (Chart 3).  Growth will also be underpinned by household consumption, but the recovery in imports will widen our trade gap substantially.

 

Chart 2


 

Chart 3


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