bis schrapnel - boomtime ahead

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    Transcript of an interview with BIS Schrapnel Chief Economist, Dr Frank Gelber, broadcast on today's ABC Radio "World at Noon" program.

    Augers well for the Australian stockmarket which usually pre-empts movements in the real economy:

    Alison Caldwell: Long-term forecaster, BIS Schrapnel, today predicted Australia was in for a prolonged economic revival up until 2007 with a recession looming later in the decade. Chief Economist Dr Frank Gelber says Australia’s economy has weathered the worst of the storm.

    Dr Frank Gelber: It’s not about the short-term; it’s about the medium to longer term, because this decade we will have an economic boom followed by recession. So building up momentum starting next year really, we need to invest – and that will drive what the Reserve Bank calls ‘asset price bubbles’, and we’ll see effectively strong investment driving the economy into a boom peaking in 2007.

    Alison Caldwell: The bad news is that a stronger economy means higher interest rates kicking in towards the end of next year. And the message for mortgagees is: ‘take out an insurance policy soon and lock in those housing rates’ Frank Gelber:

    Dr Frank Gelber: While recently people worried about deflation, that’s not our problem. On the contrary, in a year and a half to two years time, we are going to be running into capacity constraints in product markets. We are going to be running into skills shortages in the labour markets; and we are going to see the emergence of demand inflationary pressure which the Reserve Bank will not be able to ignore.

    And our forecast is that we will see interest rates rise so housing rates rise from current rates close to 6 over 10, bill rates go from current rates of less than 5 to over 9. And so we are going to see a substantial rise in interest rates over that period and that of course is the thing that will eventually burst the economic bubble.

    Alison Caldwell: And send us into a recession …?

    Dr Frank Gelber: A recession at the end of the decade. So forget about all of those things about, you know, the new Golden Age of moderate growth and low inflation that will go on forever. This is going to be a big cycle, and now we sit with a major impact from overseas, from a drought, from SARS, effecting the Australian economy and everyone’s agonising about the current weakness. Forget that. The next stage is actually general business investment coming through and driving a strong phase for the domestic economy. We’re not waiting for overseas; we’ll do it all ourselves.
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