Housing could fill mining gap PDF Print E-mail
Tuesday, 11 December 2012 09:38

Australian Chamber of Commerce and Industry (ACCI) chief economist Greg Evans said the economy - and government revenue - is too reliant on the mining boom and the massive investment that comes with it.


"As that tapers off, we have got to see what other parts of the economy are able to step up to maintain trend growth," Mr Evans said.

"At the moment there is nothing on the other side."

For the Federal Government, it's essential the economy grows at an annual gross domestic product (GDP) rate of at least three per cent, as forecast by Treasury, to ensure sufficient revenue to achieve Labor's much-promised $1.1 billion budget surplus in 2012/13.

As it stands, the government will probably have to make further budget cuts to return to the black, and pay for big ticket initiatives such as increased funding for education and the national disability insurance scheme - a tricky balancing act in an election year.

Treasurer Wayne Swan is concerned about revenues because of a steep fall in key bulk commodity prices, such as for iron ore and coal, and a near 14 per cent decline in Australia's terms of trade in the past year.

"While weaker revenues will make life more difficult, we're committed to returning the budget to surplus in 2012/13," he said in December.

The economy is growing at an annual pace of 3.1 per cent, which is slightly below trend at 3.2 per cent and well down on the four per cent-plus rate in early 2012.

Although the 2012/13 financial year ends on June 30, the final budget outcome won't be known until September, when the nation could potentially be in the midst of an election campaign.

It will be a massive turnaround if a surplus is achieved after a $43.7 billion deficit in 2011/12.

The fiscal consolidation will be a handbrake on the economy at a time when mining investment - the mainstay of growth in recent years - is being wound back due to challenging global conditions and lower commodity prices.

The Reserve Bank of Australia (RBA) has indicated the peak in investment is approaching - earlier than previously thought, and at a lower level.

But the central bank is giving it its best shot to get sectors like housing construction a new lease of life, after cutting the cash rate by 175 basis points in just over a year.

And there is every chance that it will cut again early next year, taking the cash rate to a record low of 2.75 per cent.

However, JP Morgan economist Tom Kennedy believes addressing the weakness in the housing construction sector may not be as simple as lowering the cash rate.

Residential construction has been one of the worst performing sectors of the Australian economy, shedding a net 70,000 jobs in a year.

"Given the current preferences of consumers to accumulate savings and shy away from new debt, it is likely that the construction sector's contribution to GDP will dwindle over the next few years unless residential construction activity significantly improves," he said.


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