Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Brace for rate hike - unless ...

By Henry Thornton - posted Tuesday, 7 August 2007


The case for at least one more rate hike has been clear for some time. The global economy is strong, and global inflation is rising. China’s economy is overheating and China has gone from being a global source of deflation to a generator of inflation. Like many more developed nations, China is tightening its monetary policy to rein in the inflationary risks.

Australia itself is growing strongly - although nowhere near the double digit rate of China, India and the other BRICs, Brazil and Russia. After a slower patch, retail sales seem again to be booming, sales of luxury cars are setting new records, jobs growth is still strong although slowing as overall GDP growth picks up (which is good news for productivity). Imports are growing but export volumes are also (finally!) showing signs of growth. The terms of trade - the price of exports relative to the price of imports - remain strong, perhaps still rising.

Australia’s mining companies large and small are expanding as fast as they can. Results will uniformly show large increases in revenue - at least for those companies already in production - but faster growth of costs. RIO’s results last week have set the example. These results were released along with a major ANU study that confidently predicted that the China boom would persist for many years yet.

Advertisement

Rowan Callick recently reported on this study: "Australia’s most influential economist, Ross Garnaut, [says] that China is at an historic economic and social turning point that will lead to an even bigger appetite for resources at higher prices.”

Garnaut himself was quoted directly as saying: "In 20 years time China is likely to consume more energy and metals than all of the industrialised economies today.”

Given the rush to expand output of energy and minerals to feed the China boom, it is historically unique that Australia has not generated a wage and cost explosion of enormously damaging proportions. The degree of labour market deregulation from the time of the Hawke-Keating government is the major reason for this unique outcome. The particularly helpful aspects in the recent past are the WorkChoices legislation of this government and its sensible use of 457 visas to allow a flood of skilled workers at manageable prices.

How long overall labour costs can remain contained is a vital question. Whether a Rudd Labor government can hold the line will be one of the key questions that economists and other economically literate voters will ponder as they prepare to vote in the coming Federal election.

Goods and service inflation was lower than expected in the December quarter 2006 and March quarter 2007. The latest inflation result was above expectations and even without wage pressure makes future inflation problematic.

Apart from inflation, the US “sub-prime” lending crisis is the major current cause for concern for the global economy. Its ripples are still spreading and in the past two weeks these ripples have produced a substantial equity market correction in most markets. Until Friday the correction in Australia’s market was around 8 per cent from the recent peak, but Wall Street’s ugly Friday trading is almost certain to increase the size of the correction at the start of this week.

Advertisement

Another bear point in the current global outlook is the price of oil, which has been steadily rising for some time now after the welcome drop in the lead up to the Northern summer. The upturn in the price of oil and of many other commodities is a clear manifestation of global inflation on the rise. Equity markets have become inured to the effects of dear oil, but more thoughtful investors have quietly factored inflation and the accompanying increase in global interest rates into their calculations.

As the graph suggests, corrections of 8 to 10 per cent are a feature of bull markets, and even before the current correction equity valuations were by no means as stretched as they became in the last surge of equity prices during the 1987 bull market. The current correction is most likely one we had to have in the midst of a bull market with a fair bit further to run.

Henry has spent this time on equity markets since market turmoil is a classic reason for central banks to avoid rate hikes even when the underlying economic story suggests the need for action.

  1. Pages:
  2. Page 1
  3. 2
  4. All

An edited version was first published in The Australian and this version on Henry Thornton’s website on August 7, 2007.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

9 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Henry Thornton (1760-1815) was a banker, M.P., Philanthropist, and a leading figure in the influential group of Evangelicals that was known as the Clapham set. His column is provided by the writers at www.henrythornton.com.

Other articles by this Author

All articles by Henry Thornton

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Henry Thornton
Article Tools
Comment 9 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy