From Here, To The Future

Where is Australia heading in terms of the economy, interest rates, the share market, and currency? Not even experts have a crystal ball with absolute answers, but their expertise can offer an educated guess.

We ask a panel of experts to give us their predictions on Australia’s future, as well as advice on what these predictions mean for small business.

ECONOMY

Predictions: Thanks to inflationary pressures building in areas such as shortage of skilled labour, most predict a slowing of the economy for the rest of the year and 2006. The domestic demand component of GDP is on the rise despite an excess of imports over exports.

Steve Ryan, chief economist, St George:

There is a decent chance of the overall economy slowing over 2005, and perhaps 2006. An important driver will be interest rates. The Reserve Bank has signalled they believe that the economy is up against capacity constraints; hence, they have begun nudging up the overnight cash rate. These capacity constraints are not only evident in the export sector, but anecdotal reports also suggest that many businesses are finding it hard to obtain appropriately skilled staff. Combined with the very sharp rise we have seen in commodity prices in the last three years, the risk of inflation emerging is now greater than it’s been in at least five years.

Alan Langford, chief economist, HBOS Australia—Bank West:

Despite a range of risks to the durability of the national economy, they are just that; risks that may crystallise but which should not divert excessive attention from an economy that is still generating solid employment growth despite sluggish ‘headline’ (that is GDP growth). The domestic demand component of GDP continues to grow at a solid rate, albeit slower than that posted in 2003. However, that year was too good to be true. If domestic demand had not slowed last year, we would be now looking at a cash rate closer to 6 percent per annum, rather than 5 percent per annum.

Bernie Fraser, former RBA governor:

We’ve had about 14 years of pretty sustained economic growth, with low inflation, and these sort of long periods of good performance tend to come to an end when there’s a shock of some kind—whether external or internal—or it just runs out of steam because it runs out of skilled labour or capacity and there are some signs of that happening.

What this means

Neil Wickenden and Jonathan Philpot of accountants and business and financial advisers HLB Mann Judd, Sydney:

Slowing consumer spending is not good for small business. With households tightening their spending, businesses will also need to look at their spending and any expansion plans should be carefully considered. Rising interest rates mean spending on home building decreases, so businesses in this sector should plan for a decrease in demand. Near full employment means labour costs are starting to rise, particularly with skilled labour. At times like this, employees often take the opportunity to move jobs. Higher labour costs and greater employee mobility will have a direct impact on SMEs. Wage rises will also lead to more inflationary pressures and push interest rates even higher further reducing household spending.