NO.044

OECD PREDICTS BUDGET MEASURES TO ENHANCE AUSTRALIA’S SUPPLY POTENTIAL

The OECD’s latest Economic Outlook presents a positive outlook for the Australian economy, with economic growth expected to recover strongly in 2007 and 2008, after being negatively impacted by a severe drought in 2006.  Importantly, it notes that the Government’s 2007‑08 Budget measures are likely to enhance the economy’s supply potential in the longer term.

The OECD forecasts Australia’s real GDP to grow by 3¼ per cent in both 2007 and 2008, above the OECD average growth of 2.7 per cent in 2007 and 2008.  The OECD notes that strong profits, boosted by the improved terms of trade and record capacity utilisation, have stimulated investment projects.  Over the forecast period, the OECD expects a likely rebound in agricultural production and increasing exports growth.

The OECD notes that Australia’s unemployment rate at 4.4 per cent is at its lowest level in 32 years. The OECD expects Australia’s strong labour market performance to continue, with the unemployment rate forecast to remain low and well under the OECD average.  Despite the strong labour market, the OECD states that wage increases have remained moderate. The OECD notes inflation slowed to 2.4 per cent in the first quarter of 2007 and that underlying inflation has eased.  Importantly, the OECD predicts inflation to remain within the Government’s target inflation band over the forecast horizon.

The OECD endorses the Government’s policy of maintaining a prudent fiscal stance to avoid fuelling demand, with the economy close to full capacity.

In terms of economic activity across the OECD area more broadly, the Economic Outlook forecasts growth to continue to expand strongly in 2007 and 2008, underpinned by strong job creation and falling unemployment, ongoing buoyancy in emerging market economies and favourable financial conditions.  The positive outlook is supported by solid growth in the euro area and Japan.  Although economic activity in the US is projected to moderate in 2007 due to the weak housing market, growth is expected to gradually regain momentum during 2008.  Outside of the OECD, China is forecast to continue its strong expansion, supported by accelerating domestic demand and robust export growth. 

CANBERRA

24 May 2007

Contact: David Gazard –

02 6277 7340