Housing demand to drive economy

This time last year, Australia's leading business economists said growth would slide, business investment would hit a wall, and the government would deliver a deficit instead of a forecast surplus.

The executive committee of the Australian Business Economists (ABE) was right.

The panel includes forecasters from Macquarie, Barclays, UBS, Deutsche Bank, JPMorgan and the big four banks.

This year, it forecasts an increase in housing investment and export volumes (offset by sharp falls in export prices.)

The survey, released at Thursday's forecasting conference, also has interest rates on hold and the dollar slipping to US88¢.

The economy grew just 2.6 per cent in the year to June, from 3.7 per cent a year earlier.

The committee expects growth of 2.9 per cent throughout next year and 3 per cent in 2015. It predicts growth of 7 per cent to 7.2 per cent for China.

Business investment grew at an annual rate of 15.4 per cent last year. The panel expects no growth this year, and a drop of 3.7 per cent next year and 2.5 per cent in 2015.

But it expects housing investment to surge. After a rise of 4 per cent this year, it should climb 5.7 per cent next year and 4.8 per cent in 2015.

The committee identifies low interest rates, robust population growth and demand for housing as the likely growth drivers.

It also expects household spending to pick up, climbing from an estimated growth rate of 2.1 per cent this year to 2.7 per cent and then 3.1 per cent.

"Consumers are still shackled by prudence, although in recent months there have been some encouraging signs," the panel said.

Export volumes are set to rise 6.6 per cent, and then 7.1 per cent, while the terms of trade fall 4.4 per cent over the next two years.

"These falls mean the economy will experience a net transfer to the rest of the world," ABE chairman Stephen Halmarick, of Colonial First State, said.

The forecasts have inflation remaining steady about 2.5 per cent. The Reserve Bank cash rate is also expected to remain at 2.5 per cent for two years. By 2018, the committee predicts a cash rate of 4.25 per cent.

The budget is not expected to return to surplus until 2017-18.