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Economic conditions have a big impact on home owners and buyers. In this summary of the latest ANZ Economic Outlook report, we show you the big picture so you can make the most of your investment.
The Australian economy has defied the 2001 world economic slowdown, growing by 4.1 per cent over the past year. This is one of the highest rates of growth among advanced industrialised economies.
Key factors behind Australia’s strong economy include:
- 20 years of economic reforms have made the economy more resilient
- quick action by the Reserve Bank in 2000/2001 to cut rates and stimulate the economy
- government fiscal policy such as the First Home Owners Grant scheme assisted with a housing-led recovery after the introduction of the GST
- lower interest rates, lower inflation and higher consumer spending
The outlook for the Australian economy remains positive, with growth of around 3.75 per cent expected this financial year and 3.25 per cent next year. The main issue for the economic outlook will be the transition from housing to other sources of growth.
Forward indicators now suggest that business investment is on track to take up the reins, with ex-housing GDP likely to grow by 4 per cent over 2003. Exports should improve as the world economic recovery picks up steam. But the pick-up in investment will drive imports higher and overall net exports are likely to continue to be a drag on growth.
This rosy outlook does have potential downsides. Most notably, if the global economy does not recover as expected it may adversely affect exports and business investment in Australia. Inflation is another risk. Recent corporate collapses have reduced competition and could push prices higher. This may lead to inflation persisting above the RBA’s target and hence higher interest rates and weaker growth than forecast.
Activity in the housing market remained strong in the December quarter, with growth in the construction of new dwellings offsetting some weakness in alterations and additions. New dwelling construction was up by 7.9 per cent in the quarter, after growth in excess of 20 per cent in the previous quarter. As expected, forward indicators of housing activity now appear to have peaked, with building approvals easing back in the early months of 2002 and housing finance commitments generally moving sideways. But while activity in the non-first home buyer market has moderated, the strength of building approvals and dwelling commencements in the second half of 2001 will ensure that work done remains solid until the middle of this year.
The following is a snapshot of potential conditions going forward:
- home loan interest rates forecast to rise 75 basis points over the next year
- dwelling investment likely to fall
- household spending likely to remain firm
- employment growth to continue to pick-up over 2002
Employment growth should pick-up over the course of 2002, which will provide a boost to incomes and spending. However, higher interest rates will be a negative for household incomes, as the record levels of household debt means that debt servicing costs will rise quite rapidly.
Whilst we expect these two key influences to be broadly offsetting, the risk to household spending arises if households cut back on their spending more than forecast in response to the expectation of further substantial increases in interest rates.
The good news is that business investment in 2002-2003 is tipped to grow more broadly than in previous years, reflecting stronger profitability and rising business confidence. Furthermore, corporate balance sheets are in generally good condition, with gearing remaining at low levels. As business investment is a key economic indicator, home buyers and sellers can take some comfort in the positive signs of growth and improved confidence.
Source: ANZ Economic Outlook (June quarter)
Click here to read the full ANZ quarterly Economic Outlook June Quarter 2002.
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