The National Australia Bank sees growth accelerating this year and next; unemployment falling, interest rates rising and inflation edging past 2% and then 2.5% over the next 12-18 months.

In fact, the bank says unemployment has peaked at 5.8% (where it was for much of the year up to December when it surprised by falling to 5.5%) and could drop to 4.75% by the end of this year and even lower in 2011.

It warns this will cause wage pressures as shortages appear, but doesn’t see inflation topping 3% over the next two years (2.6% by late 2011).

For 2010 we have raised our growth forecasts a touch to 3% (previously 2.75%) and still see growth accelerating to around 3.75% in 2011. In financial year terms this equates to growth of 2% in 2009/10 and 3.25% in 2010/11.

The NAB says interest rates will go up today after the RBA board meeting, and after a pause next month; then rise to about 4.75% by the latter months of the year and 5.5% by the end of 2011.

The forecasts came as the bank reported that business confidence fell in Australia in December, but business conditions remained strong.

The survey, delayed by the Christmas-New Year holidays showed, however, that business confidence remains above its long-time trend, despite the 11-point fall in the month.

The NAB said the “fall may represent a return to greater realism given current activity and trading conditions. Overall the falls in confidence were broadly based — but more marked in retail, transport and personal and recreational services. That suggests that RBA actions (and the high AUD) are starting to moderate expectations.”

But the reduction had wasn’t linked to any change in business conditions. If anything, they appear to have strengthened a little. The NAN said:

Business conditions were unchanged at +10 index points in December. That said, reflecting differences in seasonal factors, trading and profitability both improved marginally — by 2 and 1 points to respective readings of +17 and +12 points. A more marked improvement was evident in labour conditions — with the index up 5 to +7 points (indicative of continuing labour hiring).

Business outcomes across sectors were mixed. Retail, wholesale and especially personal and recreational services reported significantly weaker outcomes. But transport, finance & business services, and to a lesser extent manufacturing improved.

After sharp improvements in recent months, forward orders edged back somewhat (down 2 points) to a still strong +7 index points — broadly consistent with domestic demand increasing by around 4.75% in the second half of 2009.