New government will face economy with no real growth drivers: BIS Shrapnel

Despite the uncertainty surrounding last week’s Federal Election, whoever forms Government will continue to face a sluggish economy with effectively no growth drivers over the next few years, a new BIS Shrapnel report predicts.

High inflation, rising interest rates and a housing shortage will keep the economy subdued over the next few years even though the medium-term economic outlook remains quite strong, the report says.

The new BIS Shrapnel Long Term Forecasts 2010-2025 report predicts while GDP will continue to grow by an average of 3.8% over the next three years, higher inflationary pressures will mean interest rates will continue to rise as high as 6.5% – pushing mortgage rates above 9%.

“Leaving the election result aside, we can see there are no real growth drivers in our economy,” BIS senior economist Rachel Logie says.

“Stimulus is winding down, non-residential building is weak, dwelling activity has peaked up but not by much, consumers are in savings mode and are still very wary, even though confidence remains quite high.”

While Logie says the election uncertainty won’t affect the economy “in the short-term”, she does warn consumers will back off if a stable Government isn’t able to be formed quickly enough.

“Consumer confidence has been quite volatile, and even though it is high it hasn’t translated well into consumer spending. If election uncertainty is ongoing, it will play into that overall uncertainty which is being affected by the global economy. That is the danger if the uncertainty continues.”

The report predicts unemployment will fall below 4% by 2013, but also notes a subsequent labour shortage will push up inflationary pressures by 2012-2013, which will in turn force the RBA to raise interest rates “to a maximum” of 6.5%.

Because of this, Logie points out that no matter who wins the election, either side will face a sluggish economy, high inflation and rising interest rates before the next election in three years’ time.

At that time, one of the biggest areas of weakness will be the housing market as home owners struggle to pay off higher amounts of debt. Logie points out the current housing shortage will be made even worse over the next few years as immigration increases, putting pressure on housing prices.

“The current undersupply of housing is not likely to be adequately addressed through the current cycle given that mortgage rates are already around neutral levels,” the report says. “The combination of significant pent-up demand, strong rents and yields, rising incomes and an easing in funding for property developers, is expected to sustain a recovery in activity over the next two to three years.”

Logie also points out this will increase household sensitivity to rising interest rates, unemployment and inflation due to the effects on the rental market.

And with residential building also struggling, commercial and industrial construction are both set to remain subdued until 2013. The report points out that as both sides of politics have put an emphasis on paying down the deficit, public investment will weaken even though the private sector is still too weak to pick up the slack.

But Robinson says there is some good news.

“The mining sector is continuing to do very well, which should keep growth sustained over a long period with investment high.”

She says that while the next three years should see labour markets tight, and inflation high, the return of private investment in commercial and industrial construction and a pick-up in residential construction should keep growth high past 2013, along with low unemployment rates.

“There are weak patches, but in the medium-term, we have a very strong outlook for the economy. The mining sector is strong and now looks as though the new round of projects will be coming on very strongly.”

The report also points out that as population growth decreases over the next 15 years, some pressure will be taken off the growth of the housing market.