Recovery outpacing forecasts, says expert

The world economy is doing a lot better than anyone predicted a year ago and the speed of the recovery is still being underestimated, says Chris Caton, chief economist of Westpac's wealth management arm, BT Financial Group, in Australia.

"It has not yet dawned on everyone just how strongly some economies are growing. I would include the United States in that, as well as emerging Asia.

"And Australia survived the global financial crisis remarkably well. Japan and the eurozone are clearly lagging to some extent," he said.

"This is not to say we are in for a typical sharp recovery. But the big point that people are missing is that if you have a low starting point and you grow slowly you are pretty much guaranteed a long period of growth. It's not the worst thing in the world."

The Australian economy grew 0.9 per cent in the December quarter, making 2.7 per cent for the year. That strong growth is almost certain to continue this year, Caton said. Unemployment had been expected to go above 8 per cent but peaked at 5.8 per cent and is now down to 5.3 per cent.

But Australian inflation is still stubbornly high after a couple of years of weak growth, Caton said.

"The really ugly fly in the ointment is house prices, which a year ago were falling quite sharply but have now turned around amazingly and are growing too rapidly for their own good. The Reserve Bank has made it clear it is not going to preside over an asset price bubble of any kind, so if house prices do not slow down of their own accord they will have to be slowed down."

RBA Governor Glenn Stevens has foreshadowed up to three more rate rises this year, which would take the Australian policy rate to 4.75 per cent.

China has also tightened but Caton does not share concerns that the steps taken to restrain credit growth will overdo it and slow the Chinese economy too much.

"There is not a single sign of that."

He sees China's growth as driven increasingly by internally generated demand.

"It can sustain its high growth rates because it can switch to more domestically generated growth, and it already is."

The US economy grew at an annualised rate of 5.9 per cent in the last quarter of last year. Some have discounted that figure because two-thirds of it arose from a drop in the rate inventories are being run down.

"But it does also mean there is more of the inventory cycle to come," Caton said.

"It is not going to be a strong recovery in the US but I think we have lost sight of what the benchmark for a strong recovery is. A strong recovery is 6 or 7 per cent, a moderate recovery is 4 or 5, not 3."

Unwinding the extraordinary levels of monetary and fiscal support put in place in the wake of the crisis can be done in the context of a moderate recovery without killing it, Caton said.

"It can be done but you have to worry about the political will to do it. In many places - Australia and the United States among them - raising taxes or cutting [government] spending is very difficult."

With sovereign debt an increasing focus of the markets, Australia and New Zealand look relatively good.

"The way Australia has got through this you have got to figure people will be looking at us and saying 'It must be a great economy. They must be doing something right.' And [generally] if Australia is favourably rated, New Zealand tends to be too."