Raine & Horne

Building Up To BOOM

Written by Paul Ephron

10 Mar 2010

The Australian economy is on the threshold of a major cyclical upswing. Growth will pick up speed over the next two years and build into a boom later this decade, driven by rolling investment cycles, says leading economic forecaster and industry analyst, BIS Shrapnel. 

BIS Shrapnel's Long Term Forecasts, February 2010 Update reports the economy currently has enough spare capacity and slack in the labour markets to cater for the initial phase of the upswing without inciting either demand or cost-side pressures.

However, the forecaster warns problems will occur in three-to-four years' time when all the major construction cycles synchronise and inflationary pressures re-emerge, leading to higher interest rates. 

"We are now well and truly into recovery from what turned out to be a modest downturn, and not a recession, as other forecasters predicted at this time last year," says BIS Shrapnel report author and senior economist, Richard Robinson.

"But it's now time to look forward not backward. We're into a rebuild phase, rather than a rebound. 

Initially, housing upswing will become the key driver of growth, the report suggests.

Robinson says investment, and particularly the construction side of it, is the primary driver of growth in the economy.

"The next phase of investment will underwrite growth in the economy, but the timing and logic of each construction cycle is different, with varying knock-on effects to different sectors and across the states," he says.

"From 2010, housing construction will take over from waning public spending as the key driver of growth.

"Initially spurred on by a combination of first home owner/builder grants and low interest rates, this upswing will gather momentum into a boom by 2012.

Robinson predicts that despite lingering affordability problems, healthy consumer confidence, high rents, a chronic undersupply and rising immigration will continue to boost first home owner, investor and up-grader demand.

"But the question is, how long will the housing boom continue in the face of rising interest rates?" he asks.