The last 4 weeks in Australia have proved frustrating and fascinating. The cricket has been depressing but the chance to see most of East Coast Australia has been a revelation, writes Douglas McWilliams of the Centre for Economics and Business Research...

Primary products are important in Australia and the country is benefiting from the natural resources boom. But the different sectors are going in different directions. Agriculture is a disaster zone as a result of the drought. Agricultural production this season is expected to be down by about a third – and even that is assuming that there are no especially severe bush fires. The water shortage is one of the reasons why it is a bit surprising that the Australian authorities have been forcing both the Barmy army and everyone else to drink watered down beer not only in the cricket grounds but even at bars near the grounds.

But minerals are another thing. Production is rising sharply and prices are also strong. We are only yet at the tip of the iceberg in new minerals investment, though opening up new areas will be delayed as conflicts over aboriginal rights are sorted out.

Rising interest rates have already hit property prices, but one senses that the economy is continuing to boom. Unemployment is down to 4.6% and labour shortages are notable, particularly as Australia is adopting a much tougher line on immigration than the UK has done. IT salaries are up 12% in the past year.

Are things on the up again?

The conventional wisdom is that Australian interest rates have peaked, but I am not convinced about this, particularly if the drought continues to boost food prices and the labour shortage promotes wage inflation. Mining investment is bound to strengthen demand. One’s instinct is that both interest rates and the Aussie dollar will rise further.

While I was there, the Australian Labor party changed its leader, for the 5th time in 6 years. The new man, Kevin Rudd, is a bit of a policy wonk but seems to be starting to make some headway against a John Howard who has dominated Australian politics for most of a generation but who might be starting to look a little out of touch. He will do well to stay in power after next year’s elections.

About the author

Douglas McWilliams is Chief Executive of the Centre for Economics and Business Research based in London.