Australian economic prospects

The Reserve Bank of Australia’s Statement on Monetary Policy came out today. I am not a macroeconomist but I normally glance through this document to get a feel for what is happening.

It is 64 pages long so it must take a fair bit of effort to remain up to date – particularly given the seismic shifts in stock and financial markets that are occurring at present. Huge falls in Australian stock markets occurred again this morning following significant falls on Wall Street yesterday. The falls signify much more than a minor market correction and, if the bad news in the US sub-prime market continues, so too will the falls.

The RBA added some cautionary remarks on the financial sector onto what was obviously an intrinsically upbeat assessment of the Australian economy. They certainly did not wish to cast any doubts on the wisdom of their recent decision of the bank to further increase interest rates.

Of course interest rates are not only determined by central banks – they are also market determined and the private sector pressures now are for interest rates to take a hike.

Essentially, however, the RBA believe the Australian economy will continue to grow at above average rates through 2007 and 2008. They see the boom in the East Asian economies, in China and in India as likely to continue and even the Japanese and US economies they claim look in good shape.

The relatively high level of Aussie interest rates and the continuing strength in commodity prices had driven the Aussie dollar to high levels – it has retreated a bit with the financial mess – does not concern the RBA. Nor do high levels of capacity utilisation with inflation lying at close to the top of its range.

So the RBA is optimistic longer-term though, in its usual Delphic style, it will keep a close watch on ‘further developments in international financial markets’. It should too. I am not a macroeconomics expert but my comment would be that analysts need to watch for any signs of emerging problems in the Chinese economy.

Currently the Chinese economy is growing at 12% and its stock market is booming and it is reasonable to ask whether this sort of growth sustainable? The Chinese stock market has come close to quadrupling since 2005. Indeed it has increased by 20% over recent months. Eventually Chinese monetary authority attempts to cool the market will have an impact on this market.

The inexperienced Chinese economic managers - and those equally inexperienced Chinese investors in equity - need to get it right when the Chinese economy does experience what must be an inevitable hick-up on its path towards much higher sustained standards of economic development.