Australian economy seen running hot on resource rush

By Wayne Cole

SYDNEY (BestGrowthStock) – Australia’s economy is set to run hot this year and next as booming export earnings fuel a record rise in mining investment and broad-based gains in employment and incomes, setting it far apart from most other rich nations.

Analysts polled by Reuters forecast gross domestic product would grow a breezy 3.4 percent on average this year and by 3.5 percent in 2011, likely requiring further increases in interest rates to keep a grip on inflation.

That would be up from average growth of 1.3 percent in 2009, when Australia’s A$1.3 trillion ($1.28 trillion) economy was one of only a couple in the developed world to dodge recession.

Crucial to this good fortune is a truly staggering rise in business spending on mines and energy as companies rush to meet voracious demand from Asia, especially China and India.

That should comfortably offset the unwinding of fiscal stimulus as well as softness in some interest-sensitive areas of the economy like home construction.

“In the near term, growth should be driven by household demand and inventory rebuilding, but next year and beyond business investment and exports should take up the heavy lifting,” said Paul Brennan, head of market economics at Citi.

“Investment in new gas projects alone could boost GDP directly by around 1 percentage point in 2011,” he added. “Added to this will be significant investment in iron ore and associated port and rail infrastructure.”

Spending on liquefied natural gas projects is expanding exponentially, with the Gorgon field alone set to cost A$43 billion to develop while employing 10,000 at its peak.

Within five years, Australia could be the second-largest exporter of LNG in the world, up from sixth currently.

Asian demand has already driven massive price increases for coal and iron ore, Australia’s two biggest exports, and turned the country’s perennial trade deficit into a surplus.

It has already amassed a surplus of A$8 billion in the year to August, compared to a deficit of A$6 billion for all of 2009. Analysts now see the surplus reaching A$18 billion for all of 2010, expanding to A$23 billion in 2011.

The influx of cash has in turn boosted profits, wages, dividends and tax receipts, helping lift nominal GDP growth to a heady 10 percent in the year to June.

Firms have also gone on a hiring binge, creating net new jobs of 360,000 in the 12 months to September while driving unemployment down to just 5.1 percent.

“We view the labor market as the best gauge of the economy,” said Su-Lin Ong, a senior economist at RBC Capital Markets.

“The strength of the labor market will underpin confidence and household incomes at a time when the terms of trade are also accelerating,” she added. “Double digit nominal GDP looks set to continue into 2011.

With unemployment already near lows associated with wage pressures in the past, analysts expected consumer price inflation to pick up to 3 percent for all of 2010, and 3.3 percent in 2011.

That would push it above the Reserve Bank of Australia’s long-term target of 2 to 3 percent, a major reason analysts suspect the central bank will have to lift interest rates from their current 4.5 percent in coming months.

(Editing by Tomasz Janowski)

Australian economy seen running hot on resource rush