Country Report Australia October 1996 Main report

Outlook for 1997-98: No current-account crises are likely--

On the import side, much will depend on future trends in private consumption and investment. More moderate private consumption growth in recent months has helped keep the trade balance in the black, and even if there is an upturn in investment we do not expect the trade balance to give much concern in 1997 or 1998. However, lower commodity prices will stop large trade surpluses being recorded, and the substantial net income deficit (largely the result of servicing outstanding foreign debt) will keep the current-account deficit high, both as a proportion of GDP and in absolute terms. While there are unlikely to be any current-account crises in 1997-98, the balance of payments will remain a potential Achilles' heel until national savings can be increased.

--and inflation will fall

Although the current-account situation will remain bearable, some slight softening of the Australian dollar is expected as commodity prices weaken. As a result, the average annual exchange rate will ease from A$1.28:US$1 in 1996 to A$1.30:US$1 in 1997 and 1998, implying a slightly sharper depreciation against the Japanese yen. The Australian dollar's weakening will have little effect on consumer inflation, which will continue to fall. The headline rate of inflation should continue to drop over coming quarters, thanks in part to the recent interest rate cut, but the underlying inflation rate may remain close to the top of the Reserve Bank's 2-3% target range.

© 1996 The Economist lntelligence Unit Ltd. All rights reserved
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