Recent indicators all point to a renewed upturn in Australian economic growth later this year and into 2004. In this summary of the latest ANZ Economic Outlook report, we explain the factors shaping Australia’s economy and the implications for the housing market.

Australia’s economy is back on track after a recent rocky patch. Latest figures show that economic growth slowed to just 2% over the year to June – the weakest performance in two years.

However the overall slowdown masked a remarkably buoyant economy: domestic demand remains extraordinarily robust, business confidence is high and the battered export sector is starting to show signs of a turnaround.

In the year ahead, home owners and home buyers can expect to benefit from a strong economy. This recovery will be largely driven by a solid rebound in exports rather than the housing boom. However, higher home loan interest rates are expected to dampen household wealth gains.

World economy picking up

The state of the world economy, particularly the US economy, plays a big part in our own economic picture. The good news is that after more than two years of gloom, the world economy is picking up.

Evidence of strengthening economic activity is clearest in the US where policy settings have been much more expansionary than elsewhere. Japan, too, is showing early signs of a recovery although Europe’s economic growth has been disappointing.

The world economy now appears likely to grow by an average of 4% next year – the best outcome since 2000. Key risks include the continuing war on terrorism and the unbalanced pattern of global growth and possible reactions to it.

Hot Aussie economy carries some risks

A strong local economy is usually good news. And while next year is looking pretty good, in present circumstances economic growth gives rise to some downside risks. This is particularly acute given that domestic spending is being fuelled by borrowing rather than income growth.

Strong credit growth has seen the household debt-to-income ratio almost double in the last five years to 133%. While manageable in good times, this higher level of indebtedness increases households’ vulnerability in adverse times, particularly when interest rates rise.

Hence a significant risk to the Australian economy is posed by continued growth in borrowing for investor housing. Almost half of all lending for property over the past year has been to investors and commercial buyers. There remains a risk that the property market will overshoot, leading to price corrections.

It appears, then, that just as the sources of economic growth are set to change over the medium-term, so are the risks facing the Australian economy.

Looking ahead, one thing is clear: barring a major shock to the global economy, Australian home loan interest rates are set to rise. (See accompanying article on interest rates.) We forecast that by 2005, stronger economic growth and rising inflation will be offset by higher home loan interest rates.

Click here to read the full ANZ Economic Outlook (December quarter 2003)