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Household debt the top Australian risk: OECD
Australian Financial Review May 30 2018 7:16 PM
Jacob Greber
The faltering property market and heavy household debt are the biggest risks to the nation's rebounding economy, which is benefiting from a global growth spurt fuelled by US tax cuts and fiscal stimulus, says the OECD.
In its latest outlook the Organisation for Economic Co-operation and Development reports that "fiscal policy is the new game in town", with three-quarters of member nations stimulating their economies through increased fiscal spending and reduced corporate taxes.
It warns that while the boost is welcome, it may lead to inflationary pressures that would trigger higher interest rates.
OECD unemployment is set to reach its lowest level since the 1980s, it says, and is slowly showing signs of lifting wages across the advanced world.
A raft of risks continue to temper the outlook – led by a potential trade war, geopolitical threats and rising oil prices. The Paris-based organisation also warns a sudden surge in interest rates in advanced economies such as the US could up-end fortunes in developing countries.
"Brexit and policy uncertainty in Italy could add pressures to the expansion in the euro area," the OECD said.
In Australia, the economy is forecast to remain "robust", helped by exports and business investment, offsetting weaker household spending.
"Strong global commodity markets remain an important source of income gains and growth, but also of uncertainty and risk."
Alongside a sudden slowdown in China, Australia's biggest concerns remain high household debt.
"Unexpectedly large corrections in house prices would reduce household wealth, and could cut consumption and damage the construction sector," the OECD said.
"Risks from the housing market and high household indebtedness warrant continued vigilance."
'Ample' budget repair
It also highlighted questions around rising employment and participation rates, which are combining to keep the jobless rate higher than many would like.
It "raises questions about how much slack there is left in the economy and creates uncertainty surrounding when economic growth will translate into stronger increases in wages and incomes."
The latest outlook lends support to Treasurer Scott Morrison's budget this month – including income tax cuts – saying the speed of budget repair is "ample given projected growth".
"The government notably proposes various reductions in personal taxation over the short and medium term, with a strong economy, expending control and revenue integrity measures helping to deliver the commitment for deficit reduction."
Global economic growth is set to lift to 3.9 per cent in 2018-19 from 3.4 per cent in 2016-17, led by a significantly stronger expected surge in US growth.
The OECD has doubled its estimate for how much Donald Trump's tax package will support growth compared to the last outlook in November.
"The US Tax Cuts and Jobs Act, and the decision of Congress to raise spending limits over the next two years, imply a significant easing of US fiscal policy of around 1 per cent of GDP in both 2018 and 2019."
The US expansion is leading to higher interest rates, which may upend asset markets if they rise further than expected.
"New tensions are particularly likely in the event of an upside inflation surprise, which could prompt markets to expect abrupt increases in policy rates," the OECD said.
"More generally, further corrections in asset prices remain possible as monetary policy normalises, given still-high valuations in some markets (including equity markets in the United States; housing markets in Australia, Canada, New Zealand, Norway and Sweden; and corporate bonds), and market-based expectations of US policy rates that are still below the likely path communicated by the US Federal Reserve."