OECD downgrades Australian economic growth, but economist says outlook still positive

Australia has been given a blunt warning by the Organisation for Economic Cooperation and Development, which says growth will slow to just 2.5% this year as the mining boom tapers off.

The warning also comes alongside a separate report from the Swiss Institute of Management Development, which dropped Australia one ranking to 16th on a list of the world’s most competitive nations.

The OECD report predicts growth will slow to just 2.5% this year, although that will move back to 3.5% in 2014.

Both reports have delivered a stern reminder the economy is set to experience some turbulence as it transitions to a post-mining state.

But some aren’t so sure. CommSec economist Savanth Sebastian told SmartCompany the OECD report shouldn’t be viewed as the definitive account of economic growth.

“You can’t put too much faith in their forecasts,” he says. “They’re not saying anything the market isn’t already aware of.”

“We’ve already seen the impact over the past few months on the resources sector, so I think if anything this is coming in line with what the rest of the market has been expecting.”

The warnings have certainly been broadcast loud and clear – last week the Bureau of Resource and Energy Economics reported the decline of the resources boom has already been recorded, with total investment expected to decrease from a current $232 billion to $25 billion in 2018.

Sebastian says the OECD report reflects the truth, but there is a bigger problem – the rate at which the resources boom is declining is faster than anticipated.

“We’re not seeing interest rate sensitive areas of the economy like housing responding to rate cuts. We have these low interest rates and they are not helping, there isn’t much happening in some non-mining sectors.”

The OECD report also cited the high Australian dollar and low confidence is hurting any chance of a recovery.

Sebastian agrees. Although unemployment remains low and wages are high, low confidence is stopping the economy from transitioning to a post-mining status.

“The psychology after the GFC has seen people not want to take on any more debt. When you look at the pull-back from the mining sector, then, it means a softer domestic economy.”

There are signs of hope. The dollar continuing to fall means better performance for exporters and other currencies, although Sebastian notes the fall in the dollar is often misinterpreted by consumers as bad. In reality, it is a sign the American economy is improving.

“If anything, over the next few years the growth certainly lies in the US,” he says.

“This is a short-term pain story. The long-term story is sound and a cheaper currency is better for exporters and tourism.”

Over time, Sebastian says, confidence will return. The September election may see a turning point, with businesses and consumers traditionally nervous before such large political changes. Many businesses delay investment decisions.

“It’s not all downhill. There are certain risks around the next couple of months, but I think the RBA will alleviate those with further rate cuts.”

However, this perception of Australia’s future isn’t shared by all. The IMD ranked Australia at 16th in its list of the world’s most competitive nations, with the United States taking the top ranking. Switzerland and Hong Kong rounded out the top three.

The nations were ranked on a variety of criteria made up of statistics and polls, measuring areas such as manufacturing, diversification, exporting, investment infrastructure, support for SMEs and fiscal discipline.

 

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