Australian economy: bright future?

March 6, 2010

According to the Reserve Bank of Australia, the future of the Australian economy is so bright we should all start wearing shades. Justifying the RBA's decision to lift official interest rates a further 0.25% on March 2, governor Glenn Stevens said, "the risk of serious economic contraction in Australia [has] passed".

However, for working people, the outlook may still be gloomy.

Stevens gave some cause for concern in his otherwise upbeat statement. Explaining that inflation was moderate, he remarked that "a noticeable slowing in private-sector labour costs during 2009" had slowed — which means that the pace of wages growth has slowed to practically nothing.

Stevens also noted: "Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year. New loan approvals for housing have moderated a little over recent months, however, as interest rates have risen and the impact of large grants to first-home buyers has tailed off."

The federal government's boost to the first home buyers grant significantly raised the price of Australian homes, making them more unaffordable for many working people.

Nationally, home prices rose 11.8% in the year to January, said the February 26 Sydney Morning Herald.

First home buyers have largely been forced from the market, as "investors" cash in on rapidly rising capital gains.

On March 3, the Australian Bureau of Statistics released figures for the December quarter national accounts that showed the economy had grown by 0.9% over the three months. The lion's share of the growth is because of government stimulus.

An increase in business investment was attributed to the government's extra tax concession for work vehicles, which ended on December 31. And significantly, the March 4 Australian said, "discretionary household spending growth was flat, as consumers began to save more and spend less as the direct cash stimulus faded away".

Professor Bill Mitchell, director of the Centre of Full Employment and Equity, said that households will be hit hard by the RBA's increased interest rates.

"With the RBA tightening monetary policy the sensitivity of household borrowing may be stronger now than in the previous recovery periods", Mitchell wrote on his blog on March 3. "This is because the households are still carrying record levels of debt and there has not been significant de-leveraging in the downturn evident ...

"So the consumer recovery may be muted."

In its March 2 statement, the RBA relied heavily on growth in Asia as a signifier of better times for the Australian economy. However, the March 24 SMH quoted economist Marc Faber, who said: "I think the Chinese economy will decelerate very substantially in 2010 and could even crash."

"While China's resilience has helped support the world economy, raising demand for energy and raw materials, the bursting of a bubble would have the opposite effect", the SMH said.

This is not a view the RBA wants to hear.

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