Monday, February 13, 2006

Balanced view of the Aussi economy

The Reserve Bank’s Quarterly Statement on Monetary Policy provides a more balanced assessment of the Australian economy’s future prospects than leftwing blogs I have read recently. Global growth is seen as favouring Australia with particularly strong conditions in the US, China and the recovering Japanese economy, giving Australia sound prospects. Some points:

Commodity prices. The commodity boom has improved our terms of trade - these increased 30% over the past 3 years, the largest increase since the 1970s. Moreover, deflationary impacts of commodity and fuel prices have been mild.

Spending. Australian business investment is growing strongly. While mainly in the resources area it has been broadly-based as well. Household spending has moderated but still growing supported by growth in employment, real wages, and rising wealth from the strong equity market. Household credit growth has levelled with business credit now growing faster than credit for households.

Current Account. Exports have been the main negative factor. Export volume performance has been poor with earnings growing mainly through rising prices. Imports have grown fast, though this has moderated recently. The current account deficit is high at 6% of GDP but with investment in resources and infrastructure, export volumes will pick up. Certainly no alarmism here by the RBA though, as I indicated in an earlier post, there are concerns by many about the US deficit.

Growth/Employment. Economic growth at a little below average at 3% is likely to continue at a similar or higher pace in the future. Unemployment has declined from 11% in 1993 to 5%, its lowest since the 1970s. Indeed, labour supply capacity constraints are developing. Admittedly this is not so convincing when the unemployed are defined to include the underemployed.

Inflation. Consumer prices increased by 2.8% over the past year boosted by rising fuel prices. There are deflationary global effects of higher oil prices and direct inflationary effects. The RBA expect prices to increase by only about 2.75% this year.

Overall, the RBA’s assessment is that demand will grow in line with productive potential. Given labour market tightness, this outlook is consistent with a modest increase in underlying inflation. Obviously a strong report card for an economy in the 15th year of sustained expansion!


Bring Back EP at LP said...

Cozzie thinks, correctly ,that he will have to deliver a more disciplined budget than last time.

without the guts to cut spending there will be few tax cuts otherwise as Chis Richardson says there will be higher interest rates.

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