Finally, some good news on inflation: Economy roundup

Australia’s inflation problem could be brought under control more quickly and with less pain than expected, the Organisation for Economic Co-operation and Development has predicted.

Yesterday’s stronger than expected 0.6% quarterly GDP figure cast some doubt on whether the Reserve Bank of Australia has done enough to cool down the economy.

But according to the OECD’s latest Economic Outlook report, inflation is likely to come back to sustainable levels sooner than even the RBA expects.

The OECD’s economists predict that inflation will fall back within the mandated 2% to 3% target band by the end of next year, a year earlier than the RBA’s recent forecasts.

That achievement will come at some cost, with economic growth set to slow to below 3% in 2008 and 2009. But the landing will be relatively soft, with GDP still set to reach 2.9% this year and 2.7% in 2009.

The OECD gives tacit support to the RBA’s tightening strategy in the report and gives something of a prod to the Government with its comment that “the stabilising role that fiscal policy should play is welcome”.

Other economic data released today highlights the single biggest threat to the RBA’s inflation fighting strategy: The mining boom.

Australian Bureau of Statistics international trade data shows the deficit Australia’s balance of trade in goods and services – essentially, a measure of imports vs exports – fell a 62% in April to $957 million seasonally adjusted.

The big fall, which defied market expectations of a deficit closer to $1.7 billion, resulted from a drop in imports of consumer goods and capital and a big rise in exports – led by a 20% jump in coal exports.

ANZ economist Alex Joiner predicts the surge in Australia’s commodities exports could see the trade balance move into surplus by the end of this year – something we haven’t seen for a long time.

The downside, however, is the threat to inflation presented by the increased flow of wealth into the economy.

“The stimulus to the economy from the boost in the terms of trade poses a clear and present danger to interest rates. This could drive stronger overall economic growth and more persistant inflation than the RBA is comfortable with, leading to at least one, but probably two, further hikes in the cash rate this year,” Joiner says.

On the markets today, at 12.10pm the S&P/ASX200 is down 0.9% on yesterday’s close to 5534.4, with lower in metal and energy prices a key factor behind the fall, while the Australian dollar is trading at US95.47c.