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May 18

Short Economic Outlook for Newsletters

The economic recovery in Australia continues to be stronger than expected and is more aligned with our major Asian trading partners than other developed nations of the world. In its May 2010 Statement on Monetary Policy, the Reserve Bank forecast the Australian economy to expand around 3.25% over 2010 with increased growth during 2011 of 3.75% to 4%. These growth forecasts are significantly higher than the 2% to 2.5% growth forecasts that were made 12 months ago hence showing how much our economy has truly improved.

Some of the recent statistical releases supporting the strength of our economy include declining unemployment levels (5.3% – April 2010*); strong growth in housing prices (20% growth in year to March 2010* ); and inflation data at the upper end of the Reserve Bank’s targeted range (2.9% April 2010*). Further boosts for the Australian economy have come from continued strong commodity prices combined with a strong Chinese economy which, if it continues, augurs very well for our longer term prosperity.

Despite our relative economic strength, financial markets have resumed their turbulence thanks to increased risks of the Greek government failing to paying its debts. Greece, along with Portugal, Spain, Italy, and Ireland, borrowed heavily during the Global Financial Crisis in an attempt to rescue their failing economies and as they all have the Euro as their currency, it appears deflating their local prices and wage reduction is the only way these countries can be competitive again. Unfortunately, this typically results in stagnant economies and, for government, continued lower levels of revenue to pay their debts.

If China and our local property prices continue their phenomenal growth then local interest rates may resume their upward trend, however, the Euro crisis and its associated risks may deter the Reserve Bank from raising interest rates in the short term and should remain at 4.5%. Global sharemarkets, including our own, are expected to be volatile over the coming weeks/months whilst specifics of the $1trillion rescue package for Greece et al. and their capacity to meet their debt obligations unfolds.

*Source: Australian Bureau of Statistics

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