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Australia’s Economy Has ‘Strength’ to Meet Challenges, Swan Says

Australian Treasurer Wayne Swan
Wayne Swan, Australia's treasurer. Photographer: Eric Taylor/Bloomberg

Australia’s strong economic fundamentals mean the country will face global challenges from a “position of strength,” even with some “soft spots” in the economy, Treasurer Wayne Swan said.

Low unemployment, sturdy public finances with very low public debt and a huge pipeline of mining investment make Australia’s economic credentials among the strongest in the world, Swan said in his weekly note yesterday.

“I’m not going to sugar coat the fact that the global economic outlook remains uncertain and this uncertainty is likely to continue for some time,” he said. “There are soft spots in the Australian economy as well.” The higher Australian dollar and “a cautious consumer are making things tough for retailers, the tourism sector and manufacturers.”

Australia’s economic outlook is favorable with trade at “historic highs” on demand for commodities from China and other Asian economies, the International Monetary Fund said in a report on Aug. 6. The Reserve Bank of Australia last week lowered its forecast for 2011 economic growth to an average of 2 percent from its May estimate of 3.25 percent and raised its 2012 estimate to 4.5 percent from 4.25 percent.

Conditions are forecast to remain strong in the mining industry and those parts of the economy benefitting from “resource-sector investment,” the RBA said in its quarterly monetary policy statement issued Aug. 5.

“In other sectors, the high exchange rate and subdued levels of retail spending mean that the trading environment is likely to remain difficult,” the RBA said.

Not Immune

Australia is “not immune from events overseas,” Swan said, referring to the U.S. debt rating cut by Standard & Poor’s on Aug. 5.

As the IMF statement shows, “Australia faces the challenges from a position of strength,” he said. “We’re also located in the right part of the world at the right time -- the prospects for our region remain much stronger as the weight of global activity continues to shift from West to East.”

Australia’s unemployment rate will remain below 5 percent in 2011 and 2012, the IMF said. The external current account deficit is expected to narrow to 1 percent of GDP in 2011 before “progressively widening to about 6.5 percent of GDP in the medium term,” assuming the real effective exchange rate remains at its current level, it said.

“An upside risk is that investment in the resource sector could be larger than expected, boosting growth and adding to inflation pressures,” the IMF said. “On the downside, a key risk is that the global recovery stalls or Asian growth falters, impacting demand for commodities.”

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