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Analysts say that most likely source of a boost to the economy would be from export sector.

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Wednesday 1 June 2005

Analysts say that most likely source of a boost to the economy would be from export sector


MARK COLVIN: Peter Costello's Budget last month predicted three per cent growth for Australia, but there's no sign of it yet. 


The annual growth rate rose in the March quarter to 1.9 per cent. 


It's up from when the economy stalled at the end of last year; it bottomed at 1.5 per cent in December. 


But experts say the economy is weak and the most likely source of a boost would be from Australia's struggling export sector. 


Neal Woolrich reports. 


NEAL WOOLRICH: For more than a decade the Australian economy has been growing at around three or four per cent a year. 


But the Reserve Bank has been warning recently that those results could be a thing of the past.  


The latest figures seem to support their point. 


The Australian Bureau of Statistics says gross domestic product or GDP grew by 0.7 of a per cent in the March quarter, taking the annual growth rate to 1.9 per cent. 


ANZ Bank Senior Economist Tony Pearson says today's result isn't surprising. 


TONY PEARSON: What it does show is a rebound in growth from the very weak growth rates in September and December quarter last year. If you break it up, what it shows is that domestic demand is cooling, so we’re seeing a softening in household spending, we're seeing some peaking out of business investment, although it remains at a high level, and some winding back of construction of dwellings.  


The really big disappointment in the figures is that we're not yet seeing a turnaround in the contribution of growth from our export sector. Import growth is still outpacing export growth, and that's actually still sucking growth out of the economy. That needs to turn around over the next 12 months so that we can look forward to stronger growth rates as we go into 2006. 


NEAL WOOLRICH: Australia's trade deficit hit $2.7 billion in March, the second worst on record, and the figure out tomorrow is again expected to top $2 billion. 


Tony Pearson says the explanations for Australia's poor trade performance include the strong currency, delays in the supply chain and the effect of the drought on farm exports. 


TONY PEARSON: But overall we really should have seen stronger growth in exports than we've seen given that world growth in 2004 and this year has been very strong indeed.  


It will improve going forward, there's certainly strong demand still coming out of China. We believe the Australian dollar will ease back by the end of this year, which should help a little bit. But we've got a lot of work to do on the export front, and at the same time we need to wind back the pace of growth of imports such that the overall trade sector can once again make a contribution to growth. 


NEAL WOOLRICH: There was more bad news today for manufacturers with the release of the Australian Industry Group Performance of Manufacturing Index. 


It's reporting the lowest May reading in three years. 


Production fell for the first time since 2002 on the back of a sharp fall in new orders. 


The AIG's Chief Executive Officer Heather Ridout says Australia should boost its production of exports as a way of halting the decline in manufacturing. 


HEATHER RIDOUT: We really need to see growth come from somewhere else, and that's not forthcoming, exports are up a little bit. But it's off a very low base, and we're not terribly excited about it yet. 


I think that the performance of our exports is a major public policy concern. We have a very high current account deficit, driven in great part by a very high merchandise deficit, and we need to see the baton change from domestic to export driven growth, and it's just not happening. And I think it's an issue that should be of great concern to policymakers in Australia. 


NEAL WOOLRICH: Today's GDP result follows yesterday's announcement of weak retail sales, which fell by half a per cent in April. 


The Treasurer Peter Costello says the signs of a slowing in the economy aren't necessarily a bad thing. 


PETER COSTELLO: It's not because people are losing jobs, it's not because their incomes are falling. It's because, I believe, there is a consolidation going on. Actually I welcome that, to be frank, I welcome that.  


NEAL WOOLRICH: One of the few sectors that is holding up is the labour market, with unemployment remaining at a 28-year low. 


The threat of a breakout in wages will be the Reserve Bank's key concern when it meets again on Tuesday. 


But ANZ Senior Economist Tony Pearson says there's a clear case for the RBA to leave rates on hold. 


TONY PEARSON: There's very little chance of the Reserve Bank raising rates in the short term, with domestic demand slowing, property prices flat, demand for credit also slowing to quite comfortable levels, little inflationary pressure, no sign of a wages breakout really despite tightness in the labour market. It would be difficult to construct a case for higher rates in the short-term, and in fact our base forecast is that rates are on hold for the foreseeable future. 


MARK COLVIN: ANZ Senior Economist Tony Pearson with Neal Woolrich.