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Growth to remain around trend: Treasury

Federal Treasury officials expect the economy to grow at around trend over the next two years but concede there's uncertainty over whether the shift from mining investment to other drivers of growth will be smooth.

While resource investment is forecast to peak over the next year, they expect strong growth in commodity exports, continuing growth in household consumption and some pick-up in dwelling construction.

"It continues to be our view that the real economy will grow at around its trend rate over the next two years," David Gruen, executive director of Treasury's macroeconomic group, told a Senate estimates hearing on Thursday.

Over the medium term, iron ore and coal prices will fall as substantial new supply comes online, resulting in Australia's terms of trade also trending down.

Treasury Secretary Martin Parkinson told the hearing there had been a squeeze on mining company profits, which in turn had impacted government revenues.

He said when the terms of trade eased as commodity prices fell, there would usually be a significant fall in the exchange rate.

"The fact is, the exchange rate stayed up," Dr Parkinson said.

"What that's meant is that firms - such as in the mining sector where their revenues are in US dollars and their costs are in Australian dollars - they are getting their margins squeezed."

Dr Gruen said there was a question mark over whether there would be a smooth transition to other contributors to economic growth.

"Part of what's been holding back non-mining investment is the high level of the exchange rate," he said.

However, he did not expect this summer's devastating floods and fires would have the same material impact on the economy as the natural disasters of two years ago.

There also was reason to be cautiously optimistic about the global outlook, and global growth should pick up over the course of this year, albeit moderately.

But that depended on a series of global downside risks being avoided, Dr Gruen warned.

He said the US Congress still needed to resolve scheduled expenditure cuts in March and negotiations over its debt ceiling by May, while the euro-region crisis and geopolitical tensions in the Middle East continued to linger - the latter posing a risk to global oil prices.

The impact of pricing carbon on inflation was in line with what Treasury had expected, he said.

New data on Thursday showed that consumers had a fairly benign outlook for inflation.

The Melbourne Institute's February survey of consumer inflationary expectations found an average forecast for the consumer price index over the coming 12 months of 2.2 per cent.

This was up only slightly from the two per cent forecast in January and remained comfortably within the RBA's two to three per cent target.

"From an inflation-targeting perspective there has not been enough evidence of strong inflationary pressure for the RBA to react," the institute's research fellow Viet Nguyen said releasing the report.