Frugal consumers tipped to stunt Australian economy over next 12 months as WA named fastest-growing state

Australia will record tepid economic growth over the next year with GDP blocked by an emerging trend of frugality among consumers and a sluggish construction recovery, according to the latest Access Economics Business Outlook report.

The report comes alongside a new CommSec report which reveals Western Australia is experiencing the strongest economic growth out of all the states, due to a strong job market and renewed demand for resources.

In its June quarter outlook, Access expects Australian GDP will only reach 3.2% during the current financial year, and that growth will face threats in the form of rising inflation and subsequently higher interest rates.

The official interest rate will rise to 5% by the end of this year, and will come to 6% by mid-2012. Inflation will reach 3.1% during 2010-11.

However, it also states Australia’s growth will outpace much of the western world with unemployment to fall over the rest of the year as the job market recovers. Debt problems overseas will “constrain” growth, rather than block it altogether.

Instead, the biggest detractors to growth will be renewed frugality among consumers, sluggish construction recovery and high interest rates.

“Family finances remain stretched, and frugal is the new black for consumers,” the report states. “Consumers are remaining cautious now that Canberra’s cheques have dried up, the housing recovery is coming slower than expected, and so too is the return to strength in the pace of business spending.”

The report also states a recovery in construction is coming, “but is coming slowly, held back by the modest pace of land release and the recent lift in interest rates”.

The comment comes as a new BIS Shrapnel report released today shows commercial construction is struggling to keep up with the economic recovery.

“And the return to strength in the pace of business spending is also happening slowly. That suggests the baton pass from infrastructure stimulus to private sector recovery remains vital to Australia’s short-term outlook.”

“However, these concerns are more likely to constrain the recovery rather than choke it off, with unemployment still expected to fall further and interest rates to rise further over the next year or so.”

The report picks unemployment to fall below 5% by the end of the year, which is actually more optimistic than the Treasury’s official forecasts. The report states 350,000 jobs have been made in the past year, with average hours worked recovering as well.

“Businesses are signalling further hiring ahead, with job vacancies looking very solid, and business services are showing particularly greater interest in hiring than they have in awhile. That might just get unemployment back below 5% by Christmas.”

The biggest issue, however, is interest rates. While European debt problems have kept the RBA at bay for awhile, Access says inflation data due out this Wednesday will likely prompt the bank to move again.

“A weak economy took pressure off prices, but 2011 will see demand-driven price increases emerge again. Wage moderation also helped reduce pressures, but it too will rebound, and again 2011 looms as a year of change. And although import prices should help keep inflation down, the assistance from a rising Aussie dollar may ease, with 2011 once more seen as a key turning point.”

“Renewed growth jitters are also one of the reasons why the Reserve Bank has slowed after its initial rush of rate rises.”

The study also notes the construction and mining industries are leading the economic recovery, along with some parts of the manufacturing industry. However, it also states the retail, wholesale and utilities industries are performing at a steady pace, rather than accelerating, with those sectors untouched by economic recovery.

Meanwhile, a new CommSec report reveals Western Australia to be the best performing state in the country with the mining industry now recovering. The ACT has slipped into second place due to the expiration of a tax break for SMEs, with South Australia coming in third due to strong population growth.

“Western Australia had felt the cool winds of the global financial crisis during 2009. But with that episode now behind, the Western Australian economy has bounced back solidly, underpinned by low unemployment, firm retail spending and rising construction.”

The report found ACT will benefit from low unemployment and a strong housing market, with South Australia also performing. However, the report states middle-ranking unemployment will strain momentum in the retail sector.

The Northern Territory came next, with a strong job market and firm retail spending, with Victoria coming in fifth due to strong population growth and housing demand.

Tasmania ranked sixth due to dwelling construction, while Queensland recorded “soft” tourism demand in seventh place. “Queensland is still suffering from soft tourism demand, a more modest boost from population growth than other states and a slower resumption of mining projects compared with Western Australia after the global financial crisis.”

The report ranked the states on key indicators including economic growth, retail spending, equipment investment, unemployment, construction work, population growth, housing finance and dwelling commencements.