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Economists focused on growth prospects

AAP logoAAP 26/08/2016 Garry Shilson-Josling, Economist

Economists this week focused on growth - how much we have at the moment, how much we can have in the future, and how we might achieve it.

A flurry of data over the next couple of weeks will culminate in the June quarter estimate of gross domestic product (GDP) on Wednesday, September 7.

But this week was fairly quiet, with the June quarter construction figures a fairly low-key highlight.

The inflation-adjusted value of construction spending fell by a steep 3.7 per cent.

Westpac's Andrew Hanlan said the weakness was dominated by falling mining sector investment.

"With the sector accounting for 13 per cent of the economy, the construction downturn is a material headwind," he said.

But JP Morgan's Ben Jarman said appearances can be deceptive, as estimates of construction work done indicated the value of projects completed rather than work actually done during the quarter.

Activity is weakening, he said.

"But today's data may overstate the magnitude," he said on Wednesday after the figures were released.

And Commonwealth Bank's Kristina Clifton said the downturn in engineering work will probably bottom out soon.

"Combined with a lift in public work, through greater government infrastructure spending, we could see engineering work volumes stabilise in 2017," she said.

The construction figures are only one input into estimates of GDP growth in the quarter.

Bank of America Merrill Lynch economists Alexandra Veroude and Tony Morriss looked at other, notably the likely pattern of foreign trade.

"We expect this contribution to be significantly reduced in Q2, with export growth slower on one side and import volumes higher on the other," Veroude and Morriss said.

They have pencilled in a moderate rise in GDP of 0.6 per cent for the quarter and a pickup in annual growth to 3.4 per cent from 3.1 per cent.

Altair's Stephen Roberts agreed, but warned growth is likely to moderate over the coming year or two.

"We see spending on housing and household consumption spending as the key elements determining near-term strength in GDP growth, but also longer-term weakness," he said.

The UBS economics team, Scott Haslem, George Tharanou and Jim Xu, looked closely at consumer spending.

"We find that while consumer spending likely holds its current near-three per cent real pace over the next quarter or so, the lagged impacts of a weaker wealth trend, still low wages growth and some slowing in jobs growth, conspire to drag spending growth lower through 2017," they said.

Such outlooks for sluggish growth in Australia and other developed economies have prompted scepticism over the effectiveness of monetary policy, either conventional rate-cutting form, or less conventional bond-buying (quantitative easing) to depress longer-term rates.

But AMP's Shane Oliver said the policies have worked.

"In the absence of aggressive monetary easing, advanced countries would likely have faced depression, deep deflation and a complete financial meltdown after the GFC," he said.

Even so, he canvassed some options, including higher inflation targets and central bank financing of public sector spending, sometimes called "helicopter money".

"Of these, the measures involving a greater role for fiscal policy make more sense," Dr Oliver said.

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