Steady as it goes

Minutes from this month’s Reserve Bank rate meeting showed that Australia has weathered the global recession remarkably well. “Recent information on the domestic economy suggested that economic activity was not as weak as had been expected. Exports have been surprisingly strong, which primarily reflected demand from China,” said governor Glenn Stevens and fellow RBA board members at the rate meeting earlier this month. Indeed, while other economies have suffered export declines of up to 20 per cent or more, Australian exports expanded by 2 per cent over the December and March quarters.

Meanwhile, the government’s stimulus package and low interest rates have boosted Australian household spending. According to the RBA, retail sales figures for May showed a strong increase and were up 6 per cent from September last year, while housing loan approvals have also increased and house prices have begun to pick up. Such figures show that consumer confidence has improved which is important to keep our economy out of recession. “The early and substantial easing of both monetary and fiscal policy have been effective in supporting demand, which, if anything, has been more resilient than expected,” said the RBA.

While it is clear the RBA’s decision to lower rates to 3 per cent has had a positive effect on the economy, this does not mean the Australian economy is out of the woods. In particular, at 5.7 per cent and rising, unemployment remains an issue. According to the skilled vacancy index, vacancies across Australia decreased by 1.7 per cent to 35 in July. That brings the total number of vacancies over the year down by 68.8 per cent in Western Australia, 66.3 per cent in New South Wales, 61.9 per cent in Queensland and 55.8 per cent in Victoria. While firms have tried to limit job losses by cutting working hours, a further deterioration in the job market could have a negative impact on consumer confidence.

On balance, it appears the central bank has got the interest rate balance about right. Figures from the Australian Bureau of Statistics show headline consumer price inflation rose 0.5 per cent compared with the March quarter, and by 1.5 per cent in the year to June. Core inflation, however, was slightly higher than the government’s` 2-3 per cent target range, up 0.8 per cent quarter-on-quarter, below a 1.1 per cent increase in the March quarter, but still up 3.9 per cent in the year.

“Members judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation, while leaving adequate flexibility to respond to developments as needed over the period ahead,” the minutes read. This means the RBA is comfortable keeping the cash rate at 3 per cent, but believes the inflation outlook is docile enough to allow another cash rate cut if this becomes necessary.

Infochoice.com.au