Economic growth good, but not good enough

Kevin Rudd is right.  The latest economic growth figures do show that Australia is performing better than most other western countries.

But they are still not good enough.  And your family – or someone close to you – will suffer. as a result of that.

The Australian Bureau of Statistics reported that the Australian economy grew by 0.5 per cent in the first three months of this year – and by2.7 per cent – in the 12 months to the end of March.

With most other western countries sliding into recession, for at least part of that time, in the wake of the global economic crisis, the Prime Minister can indeed claim credit.

Especially as the bureau’s figures showed that the Federal government’s economic stimulus package played a big part in Australia’s reprieve.

Government investment was  the biggest single item, on the positive side of the Bureau’s figures.

And  the Federal Treasurer, Wayne Swan, was able to boast that new public investment spending rose by no less than 12.5 per cent in the March quarter.

“The continuing strength of public investment – up more than 40 per cent over the past year – has been driven by the government’s stimulus investment, particularly on education infrastructure,” Mr Swan said.

The real problem, though, is that 4 per cent growth is needed, just to absorb each year’s school leavers in the nation’s  workforce.

And 2.7 per cent is nowhere near that figure.

Nor is any major forecaster, including the Federal Treasury, predicting that Australia will see 4 per cent economic growth again, any time soon.

Not this year, or next.

So what can you do, to offset that issue?

Highly skilled people are always more saleable, in the nation’s job market, than those with just bare school results.

So a few extra years, either at university, or in trade training, might well prove to be a worthwhile investment, over the longer term.

Another gap also showed up in the Bureau’s growth figures.  That was in housing.

Spending on new housing fell by 4.3 per cent in the March quarter, probably because the Federal government’s first home owners’ bonus stopped at the end of last year.

That is not a good sign, though, as Australia’s housing stock has already fallen well behind population growth.

Experts estimate that the nation already needs about 120,000 more houses than it has.

Related stories:

1. Consumers take heart as good numbers roll in
2. Australian economy chalks up 2.7 per cent growth

There will be more rate rises, though

There will be more interest rate rises.

The Reserve Bank Governor, Glenn Stevens, himself is making that clear.

In his statement yesterday, explaining his board’s decision to keep interest rates on hold this month, Mr Stevens dropped two big hints.

He said Australia’s inflation rate is likely to be  ” in the upper half of the target zone over the next year.”

The bank aims to keep the nation’s underlying inflation rate within a 2-3 per cent range over the course of a business cycle. It, typically, raises rates if it believes inflation is rising too fast.

Mr Stevens also said Australia’s ” high level of the terms of trade expected to add to incomes and demand, output growth over the year ahead.”

However he added that the bank’s present target rate of 4.5 per cent appears to be appropriate “for the near term.”

The leading economist, Don Stammer takes a similar view.

However Dr Stammer warned, recently that Australian families with big mortgages should prepare for further interest rate rises, from early next year.

Meanwhile the Federal Treasurer, Wayne Swan, is taking all available credit for the bank’s latest pause, which followed six rapid fire rate rises, from late last year.

He said rates,  now, are still 2.25 per cent lower than they were when the Howard government lost office.

Mr Swan also said “This news will be welcome relief for many Australian families and businesses around the country who are of course doing it tough.

“Today’s decision means a family with a $300,000 mortgage is still paying around $450 less a month than they were prior to the onset of the global financial crisis.

“That is around $5,400 less a year.”

The Rudd government would like to see interest rates stay on hold, until after the Federal election that is due later this year.

Mr Stevens made it very clear. in his explanatory statement,  that worries over high debt levels in Europe had influenced his board’s decision to keep rates on hold this month.

“Since the Board last met, concerns about sovereign creditworthiness in several European countries have been a focus of financial markets, he said, adding:”Investors have generally displayed a good deal more caution.”

“As a result, equity prices have fallen and long-term government bond rates have declined outside of the countries most affected by the sovereign concerns.

“The Australian dollar fell sharply as part of this adjustment,” Mt Stevens said.

” Commodity prices have also softened, though those important for Australia remain at very high levels,” he added..

The bank’s decision to keep rates on hold was widely welcomed.

The Housing Industry Association described it as “appropriate.”

And the Australian Industry Group called it “a wise move.”

Related stories:

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Reserve Bank holds rates

The Federal Treasurer, Wayne Swan, has welcomed the Reserve Bank’s  decision today to keep Australia’s interest rates on hold.

He said rates,  now, are still 2.25 per cent lower than they were when the Howard government lost office.

The bank’s Governor, Glenn Stevens, announced the decision, with the following statement.

“At its meeting today, the Board decided to leave the cash rate unchanged at 4.5 per cent.

Since the Board last met, concerns about sovereign creditworthiness in several European countries have been a focus of financial markets. Investors have generally displayed a good deal more caution. As a result, equity prices have fallen and long-term government bond rates have declined outside of the countries most affected by the sovereign concerns. The Australian dollar fell sharply as part of this adjustment. Commodity prices have also softened, though those important for Australia remain at very high levels.

European policymakers have responded by assembling a large package to provide financing for the relevant countries for a period of time, stabilise bond markets and provide liquidity. They have also committed to action to bring budget deficits down and stabilise debt over time.

The effects of these various factors on the world economy will need to remain under review. At this stage, global growth is still expected to be at about trend pace in 2010. Conditions in Europe overall have been relatively weak, and the foreshadowed budgetary tightening will probably mean that this will continue, but growth is becoming more established in North America. In Asia, growth has continued to be quite strong and may need to moderate in the year ahead.

In Australia, with the high level of the terms of trade expected to add to incomes and demand, output growth over the year ahead is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing. Inflation appears likely to be in the upper half of the target zone over the next year.

Consistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago. Taking all the available information into account, the Board views this setting of monetary policy as appropriate for the near term.

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Australians rug up for winter

Australians spent more on clothes and food  in April – as winter approached – and that contributed to a 0.6 per cent rise in retail sales for the month.

The Bureau of Statistics reported today that this followed a  rise of 0.8 per cent in March, also on seasonally adjusted figures.

However the nation’s shopkeepers did not share equally in this expansion.

The Bureau also reported that department stores saw their sales fall by 2.4 per cent in April, while trade in the nation’s cafe, restaurant and take-away food sector fell by 0.7 per cent.

On balance, though, these figures still represent a good result, in an economy that is still recovering from the global economic crisis.

However, the impact of the six rapid fire rate rises, that the Reserve Bank has already announced, has now put a brake on Australia’s housing industry.

The Bureau also reported today that building approvals, throughout Australia, levelled off in April.

“This was due to a 1.9 per cent decrease in total houses approved….balanced by an increase of 3.4 per cent for other dwelling approvals,” the Bureau said.

The Reserve Bank is due to announce, early this afternoon, whether it will increase its target interest rate, of 4.5 per cent, yet again.

Economists agree, though, that this rate is already close to levels the bank regards as normal.

Home building, though, is not keeping pace with Australia’s population growth.

Current estimates suggest that the nation already needs about 130,000 more homes than it has at present.

Australia’s manufacturers, though, are still recording growth, as economic recovery continues.

The Australian Industry Group reported today that its Performance of Manufacturing Index continued to grow in May, though at a slower pace than it did in March..

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The biggest risk:it’s not eurodebt

Big as they are, Europe’s debts are probably not the biggest danger the global economy faces right now.

The Nobel prize winning economist, Paul Krugman, nominates premature withdrawal of stimulus measures, for that dubious honour.

The International Monetary Fund agrees, saying:”The main short term risk is that the (weak global) recovery will stall.”

It’s Chief Economist, Olivier Blanchard, warns that “fiscal stimulus needs to sustained until this recovery is on a firmer footing.”

Australia’s Reserve Bank Governor, Glenn Stevens, is also cautious, telling politicians in Canberra last week that “…it is a bit hard …” to argue that there is too much growth in the economy at present.

We will all see, later today, whether the Reserve Bank, itself, sticks to that view -  and keeps Australia’s interest rates on hold.

Most economists believe it will do that, even though it has been raising rates, very aggressively, over recent months.

The six rate rises it has ordered, since the middle of last year, have now taken its target rate – which now stands at 4.5 per cent – close to levels, the bank itself it regards as “normal.”

The cumulative  impact these rapid fire rate rises have had is now showing up, very clearly, in house prices.  After rising strongly, over the past year, house prices suddenly flattened in April.

This was shown in the latest Rismark Home Values index, which has just been released.

Despite present dangers, conventional theories, demanding spending cuts and an early return to surplus budgets, are once again taking hold.

As Krugman notes,  the OECD is urging advanced Western nations to go down that path.

It argues that stimulatory policies should be phased out and global interest rates should be raised.

Krugman disagrees, admitting  that while “dangers still abound” in the wake of the global economic crisis, they do not include inflation.

He insists that the stimulus measures, that followed the crisis, were “the right thing.”

“They managed to limit the damage.

“It was terrible, but it wasn’t a second Great Depression.”

Krugman says this is not the time to be inflicting pain on national economies, through unnecessarily restrictive policies.

The Rudd government has already announced a 2 per cent cap on new Federal spending over the coming year.

However, as the economist Don Stammer pointed out, that is not unduly harsh, coming a year after Federal spending rose by 15 per cent.

However, the conventional slash and burn policies do have strong support, here too.

See the Krugman article at:-

http://www.nytimes.com/2010/05/31/opinion/31krugman.html

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