There is still a risk of another interest rate rise as both sides of politics are likely to promise too much in this year's federal election, independent forecaster Access Economics says.
"That extra money will come atop the kerosene of the $70 billion of policy costs splashed onto a raging economy by the federal budget," Access director Chris Richardson said.
While country-wide inflation risks were probably worsening from a falling unemployment rate, a turn in the productivity cycle was expected, he said in Access Economics' June 2007 business outlook released today.
"There has been considerable pent up savings in labour costs from the surge in business investment in recent years," he says.
"Although wage gains are still picking up their pace, a lift in productivity is now underway. That is easing consumer pricing pressures by reducing the cost of doing business."
And business investment has been extraordinarily strong.
"Economists are naturally unflappable. We don't marvel at much. But it is not hard to marvel at the stunning cycle in business investment that has been running since early 2002," he said.
"After stripping out inflation effects, the lift in (capital expenditure) over the past five years is 85 per cent."
China's economic boom continues to drive a clear divide between Australia's "sunbelt" states of Western Australia, Queensland and the Northern Territory and the rest.
But there are signs that the country's most populous state, NSW, may soon be making an economic recovery.
Dr Richardson said the key preconditions for a NSW recovery were increasingly being met with the end of the drought and pent up demand for housing, and state output growth could outpace official forecasts as a cocktail of good news replaces the more "toxic mix" of recent years.
In the meantime, the "sunbelt state" beneficiaries of global growth have resource strengths and fast growing populations.
"Even the ACT is getting a cut of the boom, courtesy of surging federal tax revenues," Dr Richardson said.
"The federal Budget announced the creation of yet another 5,244 public servants, many of which will be in Canberra. That means the ACT's boom will continue for longer.
He said Queensland continued to look a picture of near perfect health.
"Capacity is tight - both unemployment and rental vacancies are very low, business investment spending is very high, and the state government is pouring money into water, hospitals, roads, rail and schools."
Elsewhere, in the west, the equation was simple.
"A stronger-for-longer China is a stronger-for-longer Western Australia,"
"This resource boom can't last forever, but it is not ending any time soon. And that is helping to ensure a relatively soft landing for WA's overly pumped up housing prices."
But he said while NT economic growth was sprinting as it played to its resource strength, the huge engineering spend up of recent years was tailing off, so a tapering off in demand and output was likely.
Victorian economic growth remained surprisingly close to the surging growth of its resource-based neighbours, helped by an increasing population and gaining from the struggles of NSW.
"But can Victoria rely on NSW to continue to fumble the ball? Relying on the competition to remain hapless is not a successful strategy for the longer term," Dr Richardson said.
On South Australia, he said the next few years would be crucial for the state's future as the risk of boomer retirement looms early and large for the "dodgy demographics" of Australia's oldest state.
"SA's job growth has to be strong enough to convince the boomers to stay in their jobs for longer,' he said.
Finally, the business investment boom in Tasmania that stalled in early 2006 may have further to fall, making for a more modest economic outlook.
Source: AAP
