Business investment will take off in 2011 as Australian economic growth continues, according to the annual survey of financial and macroeconomic forecasts made by members of the Executive Committee of the Australian Business Economists (ABE).

From an estimated growth rate of 3.3 per cent in 2010, median GDP growth is forecast to rise to 3.5 per cent in 2011 and remain at this rate in 2011. This growth rate is around what could be considered "trend" or "potential" growth for Australia, the ABE said.

Growth is expected to be driven by a very strong increase in business investment. This is forecast to increase by 13 per cent in 2011 and 11 per cent in 2012 thanks to a solid pick-up in mining related investment. There was not a lot of variation around the median of committee members forecasts, showing strong consensus for this to lead economic growth in 2011 and 2012

With a large proportion of Australia's capital equipment being imported, overall imports are expected to be solid, just outpacing the growth in exports to keep net-exports negative. The forecasts are for a 0.5 of a percentage point detraction from GDP growth in 2011 and a 0.2 of a percentage point detraction in 2012. That said, exports are forecast to increase by a median of 5.8 per cent in 2011 and 6.7 per cent in 2012.

Household consumption is forecast to remain strong but not return to pre GFC growth rates. Higher interest rates, some ongoing deleveraging and a more cautious attitude to spending results in a forecast for household consumption growth of 3.3 per cent in 2011 and 2.7 per cent in 2012. However, this pace of spending growth is closer to the average over the current eighteen year period of Australian economic expansion.

Dwelling investment is expected to slow, going from an estimated 4.9 per cent in 2010 to 3.8 per cent in 2011 and 2.5 per cent in 2012. The range of forecasts around the median is quite large however, with the forecasts for 2011 spanning -1.0 per cent to 8.6 per cent.

Employment is expected to grow more in-line with labour supply. Employment growth in 2010 is expected to be 2.6 per cent and the median forecast is 2.5 per cent in 2011 before moderating marginally to 2.1 per cent in 2012. Ongoing employment gains will place downward pressure on the unemployment rate, which is forecast to consistently move below 5.0 per cent in 2011, settling at a median 4.8 per cent through to the end of 2012. With the unemployment rate low, some upward pressure on wages will result in the Labour Cost Index rising from a 2010 estimate of 3.3 per cent to a median 3.9 per cent in 2011 and 4.1 per cent in 2012.

Inflation is forecast to be at the top of the RBA's 2.0 per cent to 3.0 per cent target band across the forecast horizon. At no stage was the median forecast for inflation to be below 3.0 per cent.

With an economy that is growing strongly, the Federal Government's headline budget deficit will shrink. The improvement should result in a reduction from -$56.5 billion in 2009-10 to -$35 billion for 2010-11 before reducing further to -$6.5 billion by the end of 2011-12. These median forecasts are lower than those contained in the Federal Government's Mid-Year Economic and Fiscal Outlook (MYEFO). The difference between the ABE Committee's median forecasts and the MYEFO is $13.5 billion in 2010-11 and $8.6 billion in 2011-12.

The Committee does not look for any further monetary tightening from the RBA for at least the next six months. The median forecast of the Committee is for the Cash Rate Target to be 4.75 per cent at June 2011. However, a further 75 bps of tightening is expected over the subsequent six months, which would take the cash rate target to 5.50 per cent. From this point to the end of 2012, the Committee's median forecast was for one further 25 bps hike that leaves the cash rate target at 5.75 per cent.

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The 3-year/10-year bond yield curve is forecast to flatten from its current level. Thanks to a 10-year bond yield that rises at a slower rate than the 3-year bond yield, the median forecast is for the yield curve to flatten to 25 bps by June 2011, to 10 bps by December 2011 and to invert to 5 bps by December 2012.

The Australian dollar is forecast to depreciate against the US Dollar and on a Trade Weighted Index (TWI) basis in 2011. The median forecast of the Committee is for the exchange rate to be at parity with the US Dollar and 73 points on a TWI basis at June 2011. After this date, the median forecast is for a decline to USD 0.93 and 70.5 points respectively by December 2011 and for further moderation to USD 0.87 and 65.5 points respectively by end of 2012.

Australian equities are forecast to continue rising. The median forecast for the ASX 200 is 4,800 points by June 2011, before rising to 5,300 points by December 2011 and 5,500 points by December 2012.