Bullish local forecast

THE Australian economy is strong enough to withstand a fall in the US stock market, according to a leading Australian economic forecaster.

In its economic study, Long term Forecasts 2002 to 2017, BIS Shrapnel says Australia is on the threshold of a major investment-led upswing.

What can hold Australia’s growth back, however, is not the lack of demand for goods and services from consumers, as is occurring in the US.

Instead, the expected growth cycle will be defined by capacity constraints and critical supply and labour shortages, which will lead to wage-price inflation, the report says.

This will result in mortgage interest rates returning to double-digit figures by 2005-06, sowing the seeds for a bust later in the decade, the report says.

Report author, senior economist Matthew Hassan, said business investment was already poised to rebound strongly.

“But planned investment will not be enough to prevent serious supply shortages from emerging,” he said.

Construction activity will add an average two percentage points a year to GDP growth over the next five years, with the engineering construction and non-residential building sector expected to pick up the slack of a declining housing market, the report says.

The next five years would be a lucrative time for businesses, which would create its own problems, Mr Hassan said.

“Capacity constraints, supply shortages, labour shortages and infrastructure bottlenecks will all become acute by 2004-05, with rapid escalation in costs and prices through the peak of the boom,” he said.

A new period of demand-driven inflation will emerge through the middle of the decade and reach as high as 4.5 per cent at the peak of the cycle in

2005-06.