In its last major report for the year, the Organisation for Economic Cooperation and Development (OECD) predicts the world economy will grow strongly despite the threat of higher oil prices and widening current account deficits in nations such as the US.
The organisation said that Australia’s low unemployment rate had helped underpin strong economic growth, but this had also come at a cost in terms of lower productivity.
The government’s planned industrial relations changes would go some way towards helping the economy, partly by keeping a lid on wages.
“Rapid implementation of the planned industrial relations reform would also help as it would promote productivity gains and restrain unit labour cost growth,” it said.
The OECD warned headline inflation may break the upper limits of the Reserve Bank’s target range.
This meant the bank would have to be on guard with possible interest rate rises, but it added core inflation, which excludes fuel and food prices, should not break the three per cent mark.
“The pass-through of recent oil price increases is set to raise headline inflation above the Reserve Bank’s two to three per cent target range over coming quarters,” it said.
“However, core inflation is likely to stay within the inflation target range, reflecting an opening output gap.
“Accordingly, monetary policy is expected to remain on hold.”
The OECD expects a soft landing for the property market, although this may then have a flow-on effect to the economy.
“Given the gradual decline in residential property values and record debt-income ratios, it is projected that households continue improving their balance sheets, though private consumption growth should remain solid,” it said.
The OECD is expecting Australian GDP to grow 2.6 per cent this calendar year before growing 3.2 per cent in 2006.
Inflation should hit 2.7 per cent this year before reaching 3.1 per cent next year. The unemployment rate should stay around the five per cent mark.
The current account deficit is forecast to recede to 5.8 per cent of GDP this year before moderating to 5.2 per cent of GDP in 2006.
The household saving ratio is tipped to remain in negative territory.
Treasurer Peter Costello welcomed the OECD report.
“The OECD’s latest Economic Outlook forecasts that economic growth in Australia will accelerate in 2006 and 2007,” he said in a statement.
“Continued strength in business investment and buoyant exports are expected to contribute to the strong growth.”
Globally, the OECD expects economic growth across developed nations to reach 3.1 per cent in the last quarter of this year before slowing to three per cent next quarter and then 2.8 per cent in the second quarter of 2006.
Inflation is expected to remain around the two per cent mark, while worth trade should grow at more than nine per cent next year.
OECD chief economist Jean-Philippe Cotis said it appeared strong growth was finally to work its way into the moribund European area.
But he warned there were two substantial risks – oil prices and the trade imbalances of major economies.
He said oil prices could lead to an inflation outbreak, and there was a risk of a slowdown due to the higher petroleum prices economies have had to absorb.
An even greater risk was the huge trade deficit of the United States, and the trade surpluses of nations such as China and Japan.
Mr Cotis said the US had to control its budget deficit, reform its tax system and find ways to boost saving. China had to let its currency respond to market signals, while Japan had to come up with the policies to address the ageing of its population.