Interest rates tipped to rise in 2010 as resource-rich states start recovery

Prominent Australian economics forecaster Access Economics believes the Reserve Bank will cut official interest rates once more this year before starting to increase rates in 2010 and 2011.

Access director Chris Richardson says Australia has escaped the worst of the downturn with only “collateral damage” thanks to the strength of the Chinese economy and what he calls “the remarkable resilience of Australia’s mums”, whose spending at shopping centres has actually increased 6% since the crisis began.

But Richardson has also flagged a number of problems over the next 12 months.

“Consumers will flag from here: although interest rates will stay low, the cash splash will fade and unemployment will climb,” Richardson says.

“Similarly businesses will be winding back spending through 2009-10, and the $50 billion stripped from coal and iron ore export earnings are yet to hit profits and incomes.”

Access has admitted it got its previous predictions of unemployment wrong – it now expects the jobless rate to peak at 7.5%, down from earlier predictions of a peak of 8.5%.

Access has also had a close look at the prospects for each Australian state and territory, with the resource-rich states of Queensland and Western Australia tipped to rebound most quickly.

New South Wales: Access says the “good news for New South Wales is that it has already had lots of bad news” and a modest recovery should begin over the next 12 months, led by the housing, engineering and construction sectors.

Victoria: Access says that Victoria’s position as Australia’s largest manufacturing state is hurting its economy, although strong population growth is cushioning the blow. Rising population particularly helps the state’s housing sector – which might help explain the recent boom in auction results.

Queensland: Access says the outlook for Queensland depends heavily on China and its recent coal buying spree. A surge in new infrastructure project should also help the state.

South Australia. Access says the state is doing well, partly because it lost lots of finance jobs in the 1990s so big job losses have been avoided this time around. The state also has some exposure to the cushion of the mining sector.

Western Australia: Access says the boom-and-bust cycle of the WA economy may not experience as big a downturn as in past global recessions. But like Queensland, the state’s fortunes are tied to China. “If China’s recovery stabilises into something sustainable, WA has a bad 2009-10 instead of an ugly one.”

Tasmania: Access says Tasmania’s economy is better protected from the crisis of the moment than many, partly because of a number of stimulatory measures from the Federal Government, including the enlarged First Home Owners Grant and the NBN project.

Northern Territory: Access says the Territory remains tied to the progress of big projects, which are in turn tied to the progress of China’s recovery.

Australian Capital Territory: Access says the fact the Federal Government didn’t crack down on public spending (and, by extension, public service employment) should mean the ACT has a modest recovery over the coming year.