Investment boom possible:Economists

An “all out” investment boom is possible in Australia over the next two years, according to Access Economics.

These now privatised former Treasury economists reached this conclusion – with some reservations – just a few weeks after Perth’s proud home town newspaper, The West Australian, published similar projections.

Access said the giant Gorgon LNG project – and government infrastructure projects – could boost Australia’s investment spending this year by more than $69 billion. However the private forecaster warned that even a strong investment recovery would still be a “patchwork” affair.

The usually cautious economists at Access predicted boldly that any boom would be dominated by mining projects in Western Australia.

In the latest edition of their regular publication Investment Monitor, they say “Western Australia remains the centre of the action for growth in investment at present.”

Access says this State has more than twice the value of definite investment projects under way than its nearest rival, Queensland.

“…and it continues to extend that margin,” Access added.

Its economists say that there are currently 145 projects, worth some $161 billion, awaiting final approval this year.

“Indeed, all of these projects are proposed to commence in 2010,” Access added.

Most are mining projects.

“The decisions on those project will mark the difference between investment stabilising at a high level and a further move up to an all out investment boom over the next couple of years,” the forecaster said.

But it added a caution.

“That said, it would be a patchwork boom rather than an even handed one.

“The high $A and relatively weak global demand is still wreaking havoc in some sectors.”

Access said these include manufacturing, outside the resource sector, international tourism and the construction of new office blocks.

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What now? Swan spells out his plans

The Federal government expects the Reserve Bank’s decision to keep interest rates on hold will help to sustain Australia’s economic recovery.

The Federal Treasurer, Wayne Swan, explained why, at question time shortly after Parliament resumed, for its autumn sittings.

“Today’s decision means that a families with a $300,000 mortgage are still paying around $600 a month less than they were paying 18 months ago,” Mr Swan said.

The Reserve Bank’s target rate was still 7.25 per back then. It is just 3.75 per cent now.

These rates have a big influence on home loan interest rates.

And the extra cash, now in the monthly budgets of several million young to middle aged families, packs a wallop, at suburban supermarkets and in local businesses throughout the country.

There was, of course, never any question of the Reserve Bank now returning to anything like the target rate, that it had set, back then.

At most, a rate rise of 25 – or perhaps even 50 – basis points might have been expected.

Even that, though, would have led to another round of rises in home loan interest rates.

And that would have further eroded the spending power of many Australian families.

The first three rate rises, that the Reserve Bank announced late last year, have already had that effect.

And the Reserve Bank board learnt, just three hours before it announced its decision, that business confidence slumped late last year, after the last of those three rate rises was announced.

The board’s decision, though, should be seen as a reprieve, rather than a firm declaration that Australia’s interest rates won’t rise anytime soon.

They are still well below levels the bank regards as normal.

What happens now?

The Treasurer spelt out the government’s plans as he continued his answer.

“…we are committed to a long-term strategy here,” he said.

Mr Swan said the government would do  everything it could to expand the productive capacity of the economy.

It would also do everything in its power to lessen inflationary pressures.

“We on this side of the House are determined to do everything we can to see sustainable growth which lifts living standards up and we are determined to make the necessary investments for the future,” Mr Swan said.

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Reserve Bank springs a surprise

The Reserve Bank surprised many today, by deciding to keep its target interest rate on hold at 3.75 per cent.

The Bank’s Governor Glenn Stevens, noted that the global economy is growing, and said world GDP is expected to rise at close to trend pace in 2010 and 2011.

But he added:”The expansion is still likely to be modest in the major countries, due to the continuing legacy of the financial crisis, resulting in ongoing excess capacity.”

Mr Stevens did say that in Asia, where financial sectors are not impaired, recovery has been much quicker so far.

But he noted that the Chinese authorities are now seeking to reduce the degree of stimulus to their economy.

“Global financial markets are functioning much better than they were a year ago,
Mr Stevens said.

” Credit conditions nonetheless remain difficult in the major countries as banks continue to face loan losses associated with the period of economic weakness.

“Concerns regarding some sovereigns have increased.”

He said  economic conditions in Australia had  been stronger than expected, after a mild downturn a year ago.

But he added:” The effects of the fiscal stimulus on consumer demand have now faded.

However Mr Stevens added”… household finances are being supported by strong labour market outcomes and a recovery in net worth.

“Public infrastructure spending is now boosting demand, as is an upturn in housing construction.

“Investment in the resources sector is strong.

“The rate of unemployment appears to have peaked at a much lower level than earlier expected.”

Mr Stevens said tha has, as expected, inflation had declined in underlying terms from its peak in 2008.

That had been  helped by several factors.

These had included the fall in commodity prices at the end of 2008, a noticeable slowing in private?sector labour costs during 2009, the recent rise in the exchange rate and a period of slower growth in demand.

“CPI inflation has risen somewhat recently as temporary factors that had been holding it down are now abating.

” Inflation is expected to be consistent with the target in 2010, Mr Stevens said.

Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year, the Reserve Bank chief said.

“Business credit, in contrast, has continued to fall, as companies have sought to reduce leverage, and lenders have imposed tighter lending standards and in some cases sought to scale back their balance sheets.,” he added.

The decline in credit has been concentrated among large firms, which generally have had good access to equity capital and, more recently, to debt markets; credit conditions remain difficult for many smaller businesses.

With the risk of serious economic contraction in Australia having passed, the Board had moved at recent meetings to lessen the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker.

Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point.

“Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being,” Mr Stevens said.

Interest rates to most borrowers nonetheless remain lower than average, he added.

” If economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term,” Mr Stevens said.

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Another rate rise likely today

Two factors make another rate rise today all but inevitable.

The first is that Australia’s underlying inflation rate – of 3.6 per cent – is already above the Reserve Bank’s target range.

The second is that the nation is now emerging from the slump that followed the global economic crisis.

As Chris Richardson, the director of Access Economics notes, this is not a comfortable place to be at the start of an upturn.

A  former Treasury official, himself, Richardson is well place to know how Australia’s “official family” thinks on these matters.

The Federal Treasury and the Reserve Bank are both members of that “family.”

And they have a habit of thinking alike, when assessing the current state of the economy.

However that kind of thinking is far from universal.

Employer organisations, for example, are warning that the Reserve Bank could stifle Australia’s still week recovery if it raises interest rates too quickly.

And home buyers aren’t eager to see Australia’s  interest rates rise too quickly from their recent record lows.

Accees warns, though, that despite three recent rate rises, the upward movement in rates still has further to go.

But it added a caution.

“That said, there is no great rush to raise rates,” Access said.

“In the next six months underlying inflation will head down, rather than up,”it added.

At 2.30pm today, we will all know if the Reserve Bank’s board agrees with that assessment.

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Subsidised child care still expensive – and needy kids miss out

Thousands of Australian families struggle to meet their child care bills, with mid level fees, at government approved centres, reaching $285 a week.

That national figure, from a report by the Productivity Commission, is for full time care, of 50 hours a week.

Even the  fees, for approved family day care are not much lower, at a mid level of $267 a week.

As child care fees are commercial charges and the amount of time children spending in care, weekly expenses do vary widely.

But Canberra families, which face the nation’s highest fees, must find more than $300 a week for full time child care, either at their local centres or in appproved family care.

The report, by the Productivity Commission, also exposes significant inequities in the way government child care subsidies are spent.

It shows, for example, that many of the Australian children who most need help miss out on their fair share of subsidised child care places.

These include kids with a disability, those living in remote areas, Aboriginal children and children of migrant families, who don’t speak English well, if at all.

The report says children in all of these groups get fewer places, in subsidised child care, than those from the broader community.

But poor kids don’t.

The Commission, says children from low income families get child care places at much the same rate as the broader community.

Child care subsidies, in various forms, are a big – and rapidly rising – expense for Australian governments.

The Commission reports that Federal, State and Territory governments spent $4.5 billion on these subsidies in 2008-09.

In real terms, that was a 51 per cent rise over their spending in the previous 12 months.

The Australian notion of a fair go suggests that big ticket government spending, like this, should be spread evenly throughout the community.

However the report says only 13.2 per cent of  children from non-English speaking backgrounds benefit from subsidised child care, against 18.8 per cent of the broader community.

The participation rate for Aboriginal children was just 2.3 per cent, although they make up 4.4 per cent of the population.

The Commission also said:”Children aged 0-12 years with a disability had a lower participation in child care (3.2 per cent) compared with their representation in the community (7.7 per cent).

And only 1 per cent of Australian kids, living in remote areas, get subsidised child care, even though 3 per cent of the nation’s children live in remote areas.

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