PM recommits Labor to a budget surplus

“Handing down a  Budget surplus this May will be good for the economy, good for growth and good for jobs,”  the Prime Minister, Julia Gillard declares.

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Housing market strengthens – a little

Australian house prices are still falling, but the pace of the decline has slowed:NAB survey

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Inflation:our last good figures?

Sharp falls in fruit and vegetable prices helped Australians to enjoy a brief respite from inflation over the past few months.

The Australian Bureau of Statistics reported that inflation, measured on the Consumer Price Index, did not rise at all in the final three months of last year.

On the same measure, inflation rose by 3.1 per cent over 2011, as a whole.

The Bureau also reported that the nation’s underlying inflation rose by 0.6 per cent in the December quarter and 2.6 per cent in the 12 months to the end of December.

The Reserve Bank uses a similar measure, which also excludes volatile items, like fruit prices, when it sets interest rates.

It aims to keep Australia’s underlying inflation between 2 and 3 per cent, over the course of a business cycle.

So the latest underlying inflation figures suggest that another rate cut is likely, when the bank’s board meets early next month, to review rates.

Although slow sales helped to keep most prices rises moderate last year, there were exceptions.

The price of insurance and financial services, for example, rose by 5.6 per cent lin 2011, as the costs arising from the floods in Queensland and New South Wales early last year worked their way through the system.

These can be expected to rise again this year, as those areas have, once again, been hit by serious floods.

The Bureau also reported that education costs leapt by 5.8 per cent last year.

Overall, though, the Bureau’s inflation figures reflected relatively good results.

Good economic figures, though, are likely to be scarce in the months ahead.

Major forecasters, including the International Monetary Fund, are now warning of imminent recession in Europe.

Australia’s Treasurer, Wayne Swan, says that must be seen as a warning to all countries.

Meanwhile, the lates Westpac Melbourne Institute leading index, which has just been released, is pointing, very clearly, to an even slower economy in Australia, over the months ahead.

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Europe:1930s revisited?

Is the Euro worth saving?

The choices are stark.

The IMF chief, Christine Lagarde, has brought that into sharp focus by warning that the world could soon be facing a 1930s style crisis.

In better times, talk like that might well be seen as alarmist.

Not now.

Chris Richardson, of Access Economics, also warns of dire consequences if European negotiators fail, in their efforts to bring European debt under control.

Talks, so far, have rested heavily on austerity programs.

That has already led to riots over lost jobs in Italy and Greece.

That is reminiscent of the 1930s.

There are other paths.

The Nobel Prize winning US economist is urging governments to first look at jobs, not budgets.

Which brings us back to that original question.

Is the Euro worth saving, if it plunges the world back into events like those of the 1930s?

Especially as that  can, probably,  be avoided?

How?

Well, scrapping the Euro, or at least restricting it to Europe’s stronger economies, like Germany and France, could produce extra jobs.

Suppose, for example, Greece went back to the drachma.

It could then have a very useful devaluation,

Tourists would flock back to Greece, for cheap holidays, creating jobs.

And the European debt crisis would be a little easier to resolve.

Ms Lagard’s warning was stark.

She said the danger now is that the world could slide into a “1930s moment” of isolationism” like that which led to the Great Depression.

“A moment where trust and co-operation break down and countries turn inward.

“ A moment, ultimately, leading to a downward spiral that could engulf the entire world,” she said.

Her plan is expansionary.

Ms Lagarde proposed “folding” 250 billion euros ($309.2 billion) of leftover cash in the eurozone’s rescue pot into a new permanent bailout fund.

Partly to assist in battling the crisis, both in the eurozone and further afield, Ms Lagarde said: “I am convinced that we must step up the Fund’s lending capacity.”

“In the coming years, we estimate a global potential financing need of $1 trillion. To play its part, the IMF would aim to raise up to $500 billion in additional lending resources,” she said.

And following what she termed “so much loose talk about special ‘European bailouts’,” she stressed IMF help was “for all members”.

She was speaking after talks in Athens on what can be done about Greek debt.

A decision, on that now critical issue, has been delayed for three weeks.

The primary aim, of those talks, has been to cut that debt by about 100 billion euros ($123.7 billion), a prerequisite for a second eurozone-IMF bailout.

There are now mounting signs, too, that worries over European debt issues are causing concern in Australia.

A survey, by the Business Council, for example showed that investor confidence in this country is flat, despite the mining boom.

The council reported that all indicators, except expected unemployment, are now below their five year averages.

And another survey, by Dun and Bradstreet, shows that Australian businesses are taking longer to pay their bills.

“Australian businesses are increasingly neglecting their bills with the number of severely delinquent payments jumping 28 percent over the Christmas period,” Dun and Bradstreet said.

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Rates:Another cut next month?

The Reserve Bank is rarely accused of carelessness when it sets interest rates.

But it is likely to cut rates again, when it meets next month.

That would be rapid fire action for the Reserve Bank board.

Three rate cuts over just three meetings.

The board, of course, did not meet this month.

Some things, like summer holidays, are sacred.

Inflation, of course, will be at the heart of its debate next month.

But forecasts, just published by the National Australia Bank, suggest that core inflation will remain low.

These show that wage inflation is likely to have been subdued in the December quarter.

A softening of the labour market, over that time, is likely to have restrained rises,

in that area.

Fruit and vegetable prices are likely to ease, as well.

The National Australia Bank believes housing prices have stabilised, too.

“Consequently, there is likely to be a stronger case for more accommodative monetary policy following the CPI release,” it adds.

It says: “. The economy is clearly struggling to adjust to the pressures of the mining boom.

The NAB notes, too, that the Australian economy is becoming increasingly distorted by the strength of the $A.

It says the outlook for minerals and infrastructure investment, is a distorting factor, too.

“ Beyond February, the RBA may face the issue of whether the lagged impacts of three successive rate cuts will coincide with a mining sector induced re-kindling of the domestic economy in late 2012.,” the NAB adds.  ?

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Be prepared:Access wans

Be prepared.

Both for growth and economic disaster.

The course Australia – and the world – will take over the coming year depends on whether Europe tanks or “muddles through.”

Access Economics says Australian business should be prepared for both possibilities.

“If the world muddles through, then Australia will grow faster than you think it will,” the forecaster says.

It says that will, mainly, be because coal production will rebound, after the clean up from the 2011 floods proceeds.

“That will combine with better news in retail and home building, thanks to Reserve Bank rate cuts, to keep growth relatively rapid in 2012…” Access adds.

What, though, if Europe collapses?

“… if Europe blows, Australia’s outlook tanks,” the forecaster says.

“Resource sector construction would still surge, leaving us among the fastest growing economies in the world.

“Yet that would be little consolation.

“Growth would still slow and unemployment would rise.”

That would happen as confidence was sapped and both families and businesses cut their spending.

The price of Australia’s commodity exports would also fall, as the global economy slowed, weakening demand.

European bank failures would mean a credit crunch, even if the Reserve Bank “cut

hard and fast,” Access said.

So where is the forecaster putting its money?

Happily, on the right side, although it’s a close thing.

“Europe is the key to  global growth,” Access says.

“Its mismanaged crisis means that the euro could falter and that banks go bust sending shock waves around the world.

“Yet is  still marginally more likely that the Eurozone muddles through this crisis, with sticky tape holding the Euro together and ECB funding to banks helping to keep the market wolf from the sovereign debt door.”

Well, thank Heaven for that.

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Rick Perry withdraws

Rick Perry has withdrawn from the race for Republican nomination in the US presidential elections that are due in November.

Rick Santorum has been declared retrospective winner of the Iowa Primary, in a recount that showed Mitt Romney trailing by 34 votes.

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Australia’s s unemployment eases

Australia’s unemployment rate dropped slightly – to 5.2 per cent – in December, the Australian Bureau of Statistics says.

It  stood at 5.3 per cent in November.

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