Mediocre year ahead for Australia: Macquarie

The Australian economy is expected to lag the rest of the world in terms of growth this year, Macquarie Bank predicts.

It says Australia has weathered the initial downturn in global activity, and the economy has been expanding at about 4.5% in the 2001 year.

Australia's recovery has been underpinned by the rapid pick up in housing activity and it has been supported by strong consumer spending and a recovery in business confidence.

However, Macquarie predicts that Australia's growth will fall below potential in 2002.

Its forecast is based on flat housing activity, which will remain around its levels, likewise consumption is expected to remain around trend. Net exports are also expected to be a drag on growth, while investment is expected to gradually improve.

"Whereas the global economy may be accelerating through 2002, Australia is again likely to buck the trend as the economy shifts down a gear. This will exert upward pressure on the unemployment rate, and have a moderating influence on inflation."

The single most crucial factor in determining the outlook for Australia in 2002 is profits, Macquarie argues.

It says a strong recovery in profits is critical for three reasons:

• To underpin a lift in business investment
• As a pre-requisite for stronger employment growth
• To support consumption via the wealth effect and the stockmarket.

While 2002 will be a mediocre year for Australia, the one strong performer will be profits.

"While global activity in the second half of 2002 is likely to be accelerating, this is unlikely to be replicated in Australia even through this is when easier monetary policy would usually be boosting activity."

Because of this the Reserve Bank of Australia is unlikely to tighten monetary policy.

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