Things are looking up Down Under as house prices and exports rise and the government aims to be in surplus by 2016

Australia is set for faster economic growth and shrinking budget deficits as it outperforms much of the developed world, the government said yesterday.

The sweeping improvement in the Labour government’s economic forecasts came as data showed national house prices jumped to a record high last quarter, a stark contrast to countries like the US and Britain.

Australia was almost alone among developed economies in dodging recession, thanks in part to aggressive stimulus, a sound banking system and Chinese demand for its commodities. Its relative outperformance was highlighted by the Labour government’s mid-year financial review.

The government now sees economic growth of 1.5 per cent for the year to end-June 2010, compared to a contraction of 0.5 per cent just six months ago. It also markedly lowered its forecast for the peak in unemployment to 6.75 per cent, down from 8.5 per cent which was previously projected.

That in turn meant smaller budget deficits in years to come, with the Treasurer Wayne Swan predicting a return to a surplus as soon as 2015
or 2016.

Key to the country’s outperformance was a resilient housing sector. The government’s measure of national house prices rose 4.2 per cent in the third quarter, from the previous quarter, handily topping forecasts for a three per cent increase. That left prices up 6.2 per cent on the year, recovering all the losses suffered during the global credit crisis and even surpassing the previous peak from early 2008.

The central bank is not entirely pleased with this strength, however, warning that rising house prices have a social cost. It was a bubble in house prices that ultimately led the US into its worst recession since the 1930s.

“The Reserve Bank of Australia (RBA) places more weight on Australia’s exp-ort outperformance and strong trade links with China, a revival of house price inflation and the gradual normalising of market conditions” said TD Securities-Melbourne Institute’s senior economist, Annette Beacher.

The RBA has said it wants to gradually remove stimulus and move interest rates toward neutral, which analysts tend to see as anywhere from five to six per cent. Opinion is divided on how quickly it might get there, though more than a few think it could be as soon as the end of next year.

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