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Report highlights

More than ever before, the risks to Australia's economic development come from outside what we think of as "the economy". Risks such as terrorism, oil supply, bird flu and social disruption in China loom as potentially even more important than productivity, inflation or Australia's trade performance.

That is a key conclusion of the CEDA/Fujitsu 2006 Economic and Political Overview publication. It is the latest of CEDA's annual reports to its more than 800 member organisations on the year past and the year ahead.

The Overview's economic report, authored by BT Financial Group chief economist Dr Chris Caton, forecasts that the economy will grow by 3.2 per cent in 2006. That is up from an estimated 2.5 per cent for 2005 (see page 16 of the Overview). Inflation will stay at 2.7 per cent, and the current account deficit will ease to $46.5 billion from 2005's $52.6 billion. Unemployment is forecast to rise fractionally, from 5.1 per cent to 5.3 per cent.

"Most of the biggest risks to the Australian and world economies appear to be non-economic in nature", says Dr Caton. He singles out a bird flu pandemic as a potential disruption (see page 10), highlighting studies suggesting a major outbreak could reduce world GDP by around two per cent.

Dr Caton also argues that the Chinese economy could cause problems for Australia. "Eventually, China is going to have a poor year," he says. "That will probably be for non-economic reasons – most likely because of internal Chinese social problems."

In this year's special study for the Overview, economists Dr Nicholas Gruen and Kenney Lin survey the outlook for oil prices. They find reasons for optimism – but also note that economic forecasting has failed to predict the damage from previous oil price shocks, adding a layer of uncertainty to today's forecasts.