Australian economy still firing, stockmarket surges: Economy roundup

The gap between the haves and have-nots in Australia’s two-speed economy will widen in the year ahead, with farming and mining the only sectors likely to enjoy improved conditions.

The gap between the haves and have-nots in Australia’s two-speed economy will widen in the year ahead, with farming and mining the only sectors likely to enjoy improved conditions.

According to a report by Access Economics, a line from Busselton in south-west Western Australia to Brisbane will continue to separate the growth states from the rest in 2008-09.

Access predicts every industry apart from agriculture and resources will grow more slowly in 2008-09 than it did last year, with the finance sector likely to suffer the most dramatic slowdown thanks to the global credit squeeze.

That will see Western Australia continue to perform its role as the nation’s engine room, lifting output growth from 5% to 6%, while NSW will remain the country’s economic laggard with a growth rate just over 2%.

“The gods of growth remain angry with NSW,” the report says. “The sharp jump in mortgage interest rates is tough on a state where debts are highest, while Sydney’s finance, property and business services sectors are all being hit by the credit crunch.”

Strong profits from high commodity prices mean the Reserve Bank of Australia will face a difficult task to keep inflation under control, even given the impact that high rates are having on consumer spending.

“Although interest rates are eating into the spending of many families, other families are less affected, and both businesses and governments are still spending at speed. Hence capacity remains tight as a drum and, if our continuing good incomes are spent, then inflation will be very slow to come to heel. Inflation may stay above 3% until late in 2009.”

Access’s assessment of the two-speed economy is confirmed in today’s producer price index, a measure of the prices attached to key inputs. Prices for preliminary commodities increased 3.5% in the June 2008 quarter, the largest quarterly increase since 1998, thanks to a 16.3% lift in oil and gas extraction prices, 10% in iron and steel manufacturing and 7.8% in petroleum refining.

On the markets today, a combination of bargain-hunting and renewed confidence in the finance sector has seen the biggest share price gains in over three months.

The S&P/ASX200 is up 2.8% on Friday’s close to 4973.6 at 11.30am, with NAB up 3% and all the other majors up more than 2%. Property and infrastructure stocks are also doing well – Macquarie Infrastructure, Lend Lease, Transurban and ING Office Fund are all up by 6% or more.

The positive sentiment stems from the better than expected financial results announced by US bank Wells Fargo last week, driving 4.8% gains on Wall Street between Wednesday and Friday.

The Australian dollar has also benefitted from the market confidence, lifting 0.23% since local trading opened this morning to US97.47c.