Australia Business Forecast Report Q2 2008

Publication Date	April 2008
Publisher	Business Monitor
Product Type	Report
Pages	57
ISBN Number	1745-0470
Product Code	BMI01526

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Summary

A Testing First Year For Rudd

Australia's new prime minister, Kevin Rudd, will face a challenging first year in office, thanks to the expected global economic slowdown. Meanwhile, he will pursue some subtle but potentially significant changes to government policy over the course of his administration. Among them are reviving the debate over whether Australia should become a republic, placing a greater emphasis on tackling climate change, and reducing Australia's troop presence in Iraq. In addition, we expect Rudd, who speaks Mandarin, to boost relations with China, which is an increasingly important trade partner. On the economic front, growth should be supported by strong domestic demand, but high interest rates will hurt consumers and homeowners. Meanwhile, there is the possibility that a major slowdown in global growth could hurt Australia's commodities sector.

Rudd's foreign policy is worth watching. As a Mandarin speaker, the premier is naturally inclined to boost ties with China, which is now Australia's second-biggest export destination. However, Rudd must be careful to ensure that closer relations with Beijing do not raise concerns or suspicions in the US and Japan, Canberra's traditional allies. Japan remains Australia's biggest trading partner, and is anxious about China's rising influence. While we expect the US to remain Australia's main ally, Rudd differs with the Bush administration over climate change and Iraq, and is planning to withdraw 550 combat troops from the latter country. That said, Canberra appears to be committed to its troop deployment in Afghanistan. Rudd is also aiming to hold another referendum on making Australia a republic, although the campaign for this may only gather force towards 2010.

Australia's economy should remain strong in 2008, on the back of robust domestic demand, and we envisage only a mild slowdown of GDP growth to .5% in 2008 from an estimated .9% in 2007. However, we believe that high inflation will prompt the reserve Bank of Australia at the very least to keep rates on hold, or even raise them once more to 7.50%. The main risk is that this will hurt Australia's indebted consumers and further boost the Australian dollar, which has been trading at 25-year highs against its US counterpart. Global economic weakness also poses a risk to demand for Australia's commodity exports. The previous government of John Howard had a solid economic track record, and Rudd must ensure that his administration follows suit. Consequently, the FY08/09 budget, due to be released in May, will offer more comprehensive outlines of Rudd's economic policy.

We expect the new government to introduce reforms aimed at further strengthening Australia's business environment, which already scores highly (71.8, with a global ranking of 16th out of 178 states) in our ratings. Rudd is likely to pursue labour market reform and increase spending on education and training to ease Australia's skills shortages, and also improve the country's congested infrastructure. In addition, the government is planning to cut red tape for small- and medium-sized enterprises (SMEs), and improve the country's technological base.

Content

Executive summary
- A testing First Year For ru5
Chapter 1: Political Outlook
- SWOT Analysis
- Domestic Politics
- Rudd's First 100 Days: so Far, so Good?
- Australian Prime Minister Kevin Rudd marked his 100th day in office in early March. While the new government's
- tenure seems to have gone smoothly so far, it faces some difficult tests ahead.
- Foreign Policy
- Delicately Balancing Beijing And Old Allies
- Australian Prime Minister Kevin Rudd faces a key challenge in balancing stronger ties with China and his
- country's traditional links with the US and Japan.
Chapter 2: Economic Outlook
- SWOT Analysis
- Economic Activity
- Domestic Demand resilient, But risks Mounting
- A lower figure for headline growth in Q407 masks the fact that domestic demand - the key driver behind the
- country's continued economic strength - remains robust.
- Fiscal Policy
- Labor's First Budget: Balancing Growth And Inflation
- The new Labor government's first major test of economic management will be its first federal budget, to be
- announced in May.
- Monetary Policy
- Limited room For Further rate Hikes
- While the Reserve Bank of Australia will retain its hawkish stance on monetary policy, tentative signs of a
- potential economic slowdown mean that policymakers may well be at the end of their cycle of interest rate hikes.
- Balance Of Payments
- Commodities to sustain Export Earnings
- Australia's gaping trade deficit pushed the current account deficit to a record 7.0% of GDP in Q407, as imports
- continued to fill the gap between strong domestic demand and the country's restricted productive capacity.
Chapter 3: special report
- Looking Beyond 2008
- The Future Of the World, in three Acts
- We believe that a substantial, multi-year shift in the US external accounts is under way. A weak US dollar and
- subdued domestic consumption should lead to a narrowing in the US's structural current account deficit.
- us: the rebalancing Act
- Unwinding the imbalances
- China: What if We're All Wrong?
- Our Core scenario For China
- We are retaining our positive headline growth projections for China across the forecast period to 2012, with our
- expectations of the continued success of the urbanisation process and export-driven growth model underpinning
- our assumptions.
- Japan: immigration Key to long-term Growth
- Demographic Woes Portend long-term Decline
- Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
Chapter 4: Business Environment
- SWOT Analysis
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational risk
Chapter 5: Key Sectors
- Food & Drink
Executive summary
- BMI is forecasting that food consumption in Australia will continue to grow rapidly over the forecast period,
- reaching US$32.79bn in 2012 growth of 10.4% from estimated 2007 levels.
List of Tables
- table: Food Consumption indicators -- Historical Data & Forecasts
- Petrochemicals
Executive summary
- Australia has abundant gas reserves that can be utilised for the petrochemicals sector. By 2012, gas production
- is set to reach 51.5bcm, a 26% increase over 2007 levels.
List of Tables
- Table: 2007 Federal Election result, House of representatives
- Table: Australian Cabinet list
- Table: Economic Activity
- Table: Fiscal Policy - Historical Data & Forecasts
- Table: Monetary Policy - Historical Data & Forecasts
- Table: Balance Of Payments (us$bn)
- Table: BMI Business And Operational Risk Ratings
- Table: BMI legal Framework ratings
- Table: Australia, Annual FDI Inflows
- Table: Australia's top Export Destinations, us$MN
- Table: BMI trade ratings
- Table: Australia Petrochemicals sector Data And Forecasts