Domestic economic conditions continued to firm over 2009/10, with labour markets rapidly tightening. Stimulus measures provided significant impetus to growth through the year, but these positions are now being unwound.

Lending rates are broadly neutral entering 2010/11, while inflation has bottomed out at the top end of the RBA’s target band. A surge in Australia’s terms of trade over 2010/11, together with a buoyant labour market and a recovery in profits is set to underpin strong growth in national incomes through the year. With living costs on the rise and wages growth firming, interest rates are expected to be back at 5% in 2011.

The pattern of rolling investment cycles is set to continue in the medium term with a modest round of housing construction already leading the way. Business investment is set to recover from 2011/12 underpinned by strong employment and profit growth and a further phase of minerals investment. Labour shortages are expected to become an increasing problem over 2012/13 and growing inflationary pressures are expected to be met with further interest rates rises. The resulting deterioration in housing affordability is expected to undermine demand, sending housing construction into a controlled downturn by 2014.

In the absence of a major downturn in output and employment, labour shortages will quickly resurface when the economy regains momentum over the second half of the decade. There is a real risk that a synchronised upswing in investment will send the economy into a downturn late decade.

The outlook for population growth will play a key role in determining the strength of consumer spending, demand for housing and public services, and the economy’s growth potential. The Commonwealth Government will have to address the problems of global warming, an ageing demographic and a persistent current account deficit, while the RBA will be faced with conducting monetary policy against a backdrop of perennial labour shortages.

Understanding the nature of the situation is critical to successful business planning, and will continue to be important as many of these problems are set to be perennial features of the Australian economy.

Kirrily McNamara

PH: +61 2 9959 5924