Australia’s economy still on track for 2008

Mark Dutton

While Australia’s economic outlook is fundamentally positive for 2008, there remain a number of areas of concerns that will mitigate that growth, according to a financial analyst.

AXA chief investment officer Mark Dutton said while Australia looks solid and has structurally some very sound investment opportunities, there is still a strong case to ensure you are well diversified.

“Of particular concern to the Reserve Bank is inflation. Firstly, the unemployment rate and the decoupling versus the trends overseas is worth noting, so the fact that the US started to see the rise in the unemployment rate over 12 months ago, is now translating to pressure on wages and costs,” he said.

“The other tricky issue for the Reserve Bank is they don’t want this inflation measure to continue to rise and want to arrest it, but the key drivers to it are things that monetary policies are not going to have a direct impact on.”

“This is basically food prices, which have been rising faster in the last five years than over the last quarter century and energy prices, which are also out of our control.”

Dutton said outside of those measures, the other reasons for wanting to slow growth is the labour market, and its push on wages.

“We’re running pretty close to capacity right across the Australian economy, so stepping back a little bit is desirable.”

According to Dutton, the other complication that the Reserve Bank has now acknowledged is that its measures are not the only form of tightening in the economy.

“As the bank tightens the base rate, in addition the market has been tightening the lending rate by the capital market putting a bigger margin on top of the base rate. So if you allow for that, we’ve actually had a very significant tightening.”