Country Report Australia May 2009

Outlook for 2009-10

• The popular Labor Party prime minister, Kevin Rudd, faces a tough year as the economy goes into recession, and he will have to defend his government from opposition criticism of its economic management.
• Recently introduced economic measures should ensure that Australia endures only a shallow recession, but the government may still have to pay a political price at the next general election, which is likely to be held in 2010.
• Mr Rudd shares some policy views with the new US president, Barack Obama, and this should help to improve relations between the two countries.
• The fiscal budget is expected to go into deficit in 2009-10 as economic weakness depresses revenue collection and the government continues to spend to stimulate the economy.
• The Reserve Bank of Australia (RBA, the central bank) will continue to cut interest rates, with the official call rate set to fallto 2.25% by the end of 2009.
• The Economist Intelligence Unit forecasts that real GDP will contract by 1.6% in 2009, owing to the gloomy outlook for global growth and strain in the domestic economy.
• The Australian dollar will weaken in 2009, owing to lower commodity prices, falling domestic interest rates and high levels of risk aversion among global investors.

Monthly review

• The government is due to release its budget for fiscal year 2009/10 (July-June) on May 12th, and it appears to be preparing the electorate for downgrades to economic growth forecasts and increases in public borrowing.
• Labor has scrapped its plans for a A$10bn (US$6.7bn) broadband network and has unveiled plans for a more costly broadband scheme that will take eight years to roll out.
• In April the government said that it would resurrect a bill that proposes higher taxes on pre-mixed alcoholic drinks. If the Senate again reject this bill, the government would have the option of a double dissolution election.
• The RBA cut the overnight cash rate by 25 basis points, to 3%, following the meeting of its board on April 7th.
• The unemployment rate rose to 5.7% in March as employment fell by 34,700 month on month.
• Consumer price inflation rose by 2.5% year on year in the first quarter of 2009, down from 3.7% in the previous quarter.