Australian economic growth will reach a rate of almost three per cent by the end of 2018 and an improving environment will prompt the Reserve Bank to start raising interest rates later this year.
The Organisation for Economic Cooperation and Development uses its latest Economic Outlook to paint this rosy picture of higher wages and employment growth as business investment gathers pace outside the mining sector, which will boost consumer spending.
The report comes after the Australian Bureau of Statistics figures showed the economy grew by 0.3 per cent in the March quarter, for an annual rate of 1.7 per cent.
However, the OECD warns the possibility of a large fall in house prices is the largest single risk facing the economy, which could reduce household wealth and spending and damage the construction sector, leading to significant job losses.
"Higher interest rates will relieve some of the pressure on the booming housing market," the OECD said on Wednesday.
It will also help counter the build-up of other financial distortions that can accompany a sustained low-interest-rate environment.
Australian commodities linked to the Chinese economy remain an important source of income and growth, but also bring "uncertainty and risk".
The Paris-based institution said poor weather has disrupted commodity exports and the rebound in commodity prices appears to have ended.
On the federal budget, it believes the government's approach to deficit repair is "broadly appropriate" given the projected economic growth outlook.
However, it again urged the government to undertake further tax reform that makes greater use of efficient taxes, like the GST and land tax.
It also notes the country's visa programs for migrant workers and citizenship conditions are being tightened.
"Care should be taken to ensure that these policies do not compromise Australia's access to the global talent pool," it said.
OECD'S MAIN ECONOMIC FORECASTS FOR AUSTRALIA
- 2016 - 2.4 per cent (actual)
- 2017 - 2.5
- 2018 - 2.9
- 2016 - 1.3 per cent (actual)
- 2017 - 2.0
- 2018 - 2.0
- 2016 - 5.7 per cent (actual)
- 2017 - 5.6
- 2018 - 5.4