Get set for slower growth: RBA

The Australian economy is likely to slow significantly in the period ahead, as shoppers spend less and the global credit squeeze continues to take its toll, the central bank has said today.

In its monthly statement on monetary policy released today, the Reserve Bank of Australia describes an economy that is being torn in two directions, with interest rates driving domestic demand lower at the same time as surging resource export prices pump money into the country.

The RBA says it expects Australia’s terms of trade to rise by around 20% in 2008, well above already significant increases of recent years.

Even so, the central bank appears confident that its campaign of interest rate cuts will succeed in taking some heat out of the economy, albeit slowly – inflation is set to remain at around 4% in 2008, still be above 3% in 2009 and only fall back within the RBA’s 2% to 3% target band by the end of 2010.

Of course, that prediction depends in part on something the RBA has little control over – government spending. According to Access Economics, this will require significant self-restraint on the part of the Federal Government because Treasury coffers will be bursting with revenue from the mining boom in the years ahead.

The magnitude of the boost to coffers produced by the resources boom is highlighted by a couple of nifty figures produced by Access. It estimates the boom will add $24.8 billion to the budget bottom line in 2008-09. That means if Treasurer Wayne Swan delivers the expected surplus in the vicinity of $17 billion, without the windfall from the resources sector the budget would actually be in deficit to the tune of $4 billion.

On the markets today, at 12.35pm the S&P/ASX200 is up 1.3% on yesterday’s close to 5796.5, thanks primarily to buying in resources stocks and the positive reception to NAB’s announcement of an 8% lift in first-half profits to $2.24 billion.