Australian confidence 'fragile': OECD

The next Australian government should be prepared to push the budget even further into deficit if the economy weakens, the Organisation for Economic Co-operation and Development says.

The Paris-based organisation says confidence is "fragile", the business situation "relatively discouraging" and growth outside the mining sector "timid".

"If activity worsens significantly, the authorities should not hesitate to ease fiscal policy," it says in its latest economic outlook.

The views are widely thought to reflect those of the Australian Treasury. It stations an officer in Paris to work with the OECD.

The report paints a picture of an economy transitioning away from growth driven by mining investment. But it says "the new drivers of growth are yet to emerge".

In the meantime, the outlook is uncertain. Growth should slip to 2.6 per cent this year before recovering to 3.2 per cent next year. But if new drivers of growth do not emerge, the government should ease budget conditions that are themselves weighing on economic growth.

In another potential insight into the Treasury's thinking, the OECD says Australia is well advised to boost the goods and services tax, cut the company tax rate and "improve the effectiveness of housing taxation", an apparent reference to the tax-free status of the family home and to negative gearing.

Opposition leader Tony Abbott has promised to commission a taxation white paper with no topic off limits should he win office. The terms of reference for the Rudd government's Henry Tax Review precluded discussion of the GST.

The OECD says the advanced economies should strengthen throughout 2013 and 2014, helped by very low interest rates, improving financial market conditions and slowly recovering confidence.

The US is likely to recover the fastest, recording growth of 3.2 per cent by the end of 2014. The eurozone will grow by only 0.1 per cent in 2013 and 1.5 per cent in 2014.

Japan will grow unevenly, recording unusually fast growth of 3 per cent in 2013 followed by a return to tepid growth of 0.5 per cent in 2014.

"The global economy is moving forward at multiple speeds," OECD chief economist Pier Carlo Padoan says in the report. "Each path carries its own mix of risks".

-An unexpected slump in construction activity - particularly engineering construction - wiped $1 billion off Australia's gross domestic product in the March quarter, raising fears the baton might slip in the changeover from mining to the rest of the economy.

The Bureau of Statistics reports that seasonally adjusted construction activity in Australia shrank by 2 per cent in the first quarter of 2013, wiping out almost all its growth over the past year.