Where the bank guesses we are headed. It is not an easy time to be an economic forecaster with the outcome of the financial and political turmoil in Europe impossible to predict.

But, for what it is worth, Australia’s Reserve Bank has a go in its quarterly statement on monetary policy that was released this morning.

The RBA statement says that, reflecting recent developments in both the domestic and global economies, the Bank’s forecasts for Australian GDP growth over the next couple of years have been lowered. In 2011, growth is now expected to be around 2¾ per cent, with the slow recovery in coal production accounting for a significant part of the downward revision since earlier in the year. In 2012, growth is expected to be around 3–3½ per cent and to be a little stronger in 2013.

Over most of the forecast period, domestic demand is expected to grow at an annual rate of around 4 per cent, with growth in imports running substantially faster than this. In the central scenario, the unemployment rate is expected to increase a little before moving lower again, to around its current level.

The mining boom remains a central element in these forecasts, with mining investment expected to increase very strongly over the next few years, particularly in the LNG sector. In contrast, growth in the non-mining economy is expected to remain below average. The household saving ratio is forecast to remain around its current level and growth in public demand is expected to remain subdued, given ongoing fiscal consolidation.

The inflation forecasts have also been lowered, reflecting both the lower starting point and the revisions to the growth forecasts. In underlying terms, inflation (excluding the effect of the carbon price) is expected to be around 2½ per cent in 2012, ½ percentage point lower than forecast at the time of the August Statement. In 2013, inflation is expected to pick up a little, but still be consistent with the inflation target. The year-ended rate of CPI inflation is expected to fall below underlying inflation in early 2012 as banana prices return to more normal levels. It is then expected to increase to around 3¼ per cent following the introduction of the price on carbon in mid 2012, before again easing back.

This general outlook for inflation is conditional on aggregate wage growth remaining at around its current pace. It is also conditional on a pick-up in productivity growth as firms respond to competitive pressures and take advantage of lower prices for capital goods.

The largest risk to these forecasts is the sovereign debt and banking problems in the euro area, as discussed above. The Bank’s central scenario continues to be one in which the European authorities do enough to avert a disaster, but are not able to avoid periodic bouts of considerable uncertainty and volatility. A worse outcome in Europe would adversely affect the Australian economy, and underlying inflation would be likely to decline. The main upside risk to inflation comes from growth in unit costs turning out to be faster than is currently expected due to either a continuation of low productivity growth or a pick-up in wage growth.

Why the secrecy? A somewhat passionate defence published in The Australian this morning of its former editor Paul Whittaker and his dealings with the federal police. This extract, from the printed paper, by Hedley Thomas about his brother-in-law gives something of the flavour:

It’s differences of opinion that make for a controversy and I’m sure readers of both Crikey and The Oz are quite capable of making up their own minds about the rights and wrongs of this one. But one thing that puzzles me is why such a crusading editor, so keen on the public’s right to know, was party to the attempts to keep details of his conversation with the acting federal police commissioner secret

The disgraceful Opposition. I have written on Crikey‘s The Stump about the disgraceful attempt by Tony Abbott and Joe Hockey to end bipartisan support for the work of the International Monetary Fund with some comments by the British chancellor given as their reason for opposing Australia increasing its contribution.

Now that it is clear that the UK will be providing its share of extra loan funds to the IMF will we now get a retraction from the opposition pair?

Dennis can have the words, I’ll settle for the picture. Yet another attempt by Dennis Shanahan to disparage the Prime Minister. He writes this morning that the concentration at the G20 meeting on financial troubles in Europe means she will get no electoral mileage from the visit.

Pictures like this one I’m sure will do Julia Gillard more good than any ponderous words of analysis.

Peter Fray

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