Country Report Australia October 1996 Main report

Outlook for 1997-98: No private consumption boom is likely--

While the government's efforts to cut public spending will have a direct and calculable effect on certain aspects of government consumption, which is likely to grow at annual rates of only 1-2% over the forecast period, the effects of planned reforms on other components of gross domestic product will be more complex. The new labour relations legislation, likely to be presented to parliament soon, will make it much easier for firms to dismiss people: one big question is whether the increased uncertainty this creates will encourage individuals to moderate consumption and increase savings. Anticipation of these reforms may have lain behind the increase in the savings rate in the second quarter of 1996 (see Economy). Private consumption is also unlikely to be encouraged by any precipitate fall in interest rates, with the new governor of the Reserve Bank, Ian McFarlane, seen as tough on inflation, and with the bank now given official inflation targets (see Money & finance).

--but business remains optimistic--

High real interest rates are also likely to discourage any rapid revival in residential investment in 1997, although the slide in private spending on dwellings appears to have halted. The outlook for business investment is rather more difficult to predict: although the corporate sector has protested against some of the measures in the 1996/97 budget (notably the removal of certain implicit subsidies, for example the Development Import Finance Facility), it remains upbeat about prospects for future investment (see Economy), and has much to gain from the government's enthusiasm for deregulation and privatisation.

--and the outlook for export volumes is generally good

The outlook is generally good for the volume, if not the value, of rural exports over the forecast period. The volume of exports of grains and industrial crops seems likely to increase during 1997, due in part to continued recovery from drought, although growth in livestock exports may be constrained by herd rebuilding. Forecasts from the semi-official Australian Bureau of Agricultural and Resource Economics (ABARE) envisage sharp increases in the volume of oil, liquid petroleum gas (LPG), copper and diamond exports in fiscal year 1996/97 (ending June), along with less marked increases in iron ore, silver and tin exports. Previous investments in the mining industry are starting to yield results, despite rather lower forecast prices for many commodities.

© 1996 The Economist lntelligence Unit Ltd. All rights reserved
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