UBS predicts two faces to the Aussie Economy for 2006

In the view of UBS, 2006 will be a story of two halves for the Australian economy, where the first six months is likely to produce better results than the second six months.

The broker expects the current moderate recovery in economic growth to continue for the next few quarters, but the fact high commodity prices have been masking issues for the domestic economy is likely to be revealed in the December half next year.

In the broker’s view the six months to June should see profits, capital expenditure (capex), employment and household income continue to record strong growth, supporting modest growth for the household sector.

The broker suggests the risks to the housing sector are on the upside given demand remains strong, helped by positive trends in long-term arrival data.

But as upward pressure on inflation and wages continues the broker expects interest rates will go higher, leading to a cooling off in growth.

For Australia the broker suggests this could be combined with weaker commodity prices in 2007, which suggests a more difficult period.

The broker’s estimate of weaker commodity prices in 2007 follows what it considers will be a flat 2006, where metal prices are more likely to track sideways, though it notes with capacity constraints remaining in place the risk to its estimates is on the upside.

Relating all this to the Australian equities market, the broker suggests the ongoing strength in the commodities sector should underpin near-term profit growth.

As a result the broker is forecasting a 5% increase in the ASX200 index by the end of 2006, its target being 4,800.