OECD warns on cuts, pushes macroprudential

From the OECD overnight:

Output is projected to increase by 2½ per cent in 2014 and by nearly 3% in 2015, with a general pick-up in demand offsetting declining investment in the resource sector. Some economic slack will remain and the unemployment rate will not begin to edge down until the second half of 2015. As a result, there will be little inflation pressure, although rapid growth in house prices and mortgage lending requires continued close attention.

Given near-term uncertainties in the rebalancing of the economy away from investment in the natural resource sector, heavy front loading of fiscal consolidation should be avoided. Against the backdrop of the projected recovery, monetary stimulus should start to be withdrawn in the first half of 2015.

The Australian adds:

…The OECD’s commentary has been prepared after close liaison with Treasury and is understood to closely reflect the views of the Treasurer’s department.

Growth forecasts may be upgraded in the budget, with the OECD expecting that growth will rise from a weak 2.6 per cent this year to 2.9 per cent in calendar 2015.

My advice is don’t upgrade growth to anything like 3%. You’ll be making the budget a hostage to declining fortunes. And from the AFR:

In a report written with input from Treasury officials that downgraded Australia’s growth outlook in 2015 to “below average”, the Paris-based OECD rang alarm bells about the dangers of relying too much on record-low interest rates to support the economy.

Urging the Reserve Bank of Australia and other regulators to consider New-Zealand-style limits on what banks can lend to home buyers, it called for increased vigilance over the frothy property market and said interest rates would need to be hiked from early next year.

In other words, contain housing, lower the currency, build quality infrastructure. What a shame they’re not in charge.