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Two per cent growth is something to brag about

05 Nov 2008 6:27 PM
Two per cent growth is something to brag about

By Colin Brinsden, Economics Correspondent

CANBERRA, Nov 5 AAP - If the government really did choose to sneak out the mid-year budget review on the day the US presidential election would be grabbing the headlines, why?

When other economies are falling like a house of cards into recession, the fact that Australia will be holding its own with two per cent economic growth this financial year and 2.25 per cent in the next, it really is something to boast about.

Treasurer Wayne Swan says that if he had released the Mid-Year Economic andFiscal Outlook (MYEFO) earlier this week it would have clashed with the Melbourne Cup, and tomorrow he's flying off to a G20 meeting.

But it didn't stop opposition treasury spokeswoman calling it a "cynical political exercise".

That aside, there still is a risk that the economy could subside into a quarter of negative economic growth, but the likelihood of shrinkage in two quarters on the trot - a technical recession - would be near impossible if you are to end up with two per cent growth.

Then there are the budget surpluses.

A relatively slim5.4 billion surplus is now forecast for this financial year, a massive reduction from the21.7 billion predicted in May, and the surpluses will get even smaller over the next two years.

While there will be angst that huge sums of taxpayers' money are being whittled away, surpluses are supposed to be spent at a time of economic downturn.

These are the so-called `automatic stabilisers' coming into play.

Of course, rising unemployment is something nobody likes to see, but a riseto 5.0 per cent by June next year, and then to 5.75 per cent 12 months later, is a far cry from some of the doomsday scenarios being touted in some quarters.

This assumes, of course, that Treasury has got it right.

Some economists believe it is being far too optimistic in the current fragile global economic climate.

For example, JP Morgan chief economist Stephen Walters believes the economyis already dropping into a "shallow recession" and expects negative growthwill be recorded in the current quarter and next.

He expects the jobless rate to be nine per cent at the end of 2010.

"The gloomy near-term outlook ... means the budget will be under significant pressure from plunging revenues, partly owing to a reversal in the previously soaring terms of trade, and higher welfare payments," Mr Walter says.

"The commonwealth budget probably will be in deficit in the current fiscal year, and even further in the red in 2009-10."

NAB Capital chief economist Rob Henderson is predicting just 1.5 per cent growth for both 2008-09 and 2009-10 and an unemployment rate of 6.5 per centby mid-2010. This would see the budget go into a10 billion deficit by 2010.

One thing is clear, though.

Inflation is no longer a worry for either the Reserve Bank or the government.

The central bank slashed interest rates again yesterday - not something normally associated with acute price pressures - and inflation was clearly farfrom Mr Swan's mind this morning.

When Mr Swan was asked for his forecast for CPI (consumer price index) at his MYEFO press conference - reporters didn't have the MYEFO document at that stage, much to their annoyance - there was silence as he fumbled through papers to find the answer.

The pause lasted for more than a minute, but it seemed like an eternity as the cameras continued to roll.

He did find it in the end.

For those still worried about inflation, the MYEFO forecast of CPI is 3.5 per cent for this financial year and 3.0 per cent for the next.

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