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

Rifts risk economic prosperity

By Henry Thornton - posted Tuesday, 3 May 2005


Australia's terms of trade will stabilise or even fall when global growth slows from its recent unsustainable rate, removing a welcome source of external stimulus.

The growth pessimists of Treasury may emphasise these points in their notes for today's meeting of the board.

Of course, Australia's current account deficit remains at a dangerously high level, above the traditional crisis trigger of 6 per cent of GDP. This is despite high terms of trade and low global rates of interest - both factors that may be about to take a distinct turn for the worse.

Advertisement

Treasury is probably still in the traditional Canberran camp of CAD unconcern. But Treasury will be mighty embarrassed if Australia suffers a traditional current account crisis, and the Reserve will share the discomfort - this issue should occupy a fair bit of discussion today.

The main focus will, however, be on inflation. CPI inflation in the March quarter was a "mere" 0.7 per cent, or 2.4 per cent in year-on-year terms, much to everyone's relief, with the Treasurer looking as happy as he gets on national television.

Yet the danger signals for inflation remain. It was low traded goods and services prices that kept overall consumer inflation down in the March quarter - against the trend as the price of oil was lower than it had been and the currency is the high end of its likely future range. Non-traded goods and services prices, including a range of prices heavily influenced by governments, increased at rates well above the Reserve Bank's target range.

With commodity prices rising and, if the price of oil stays high and the currency falls, overall inflation in future will be ever closer to the rate of non-traded goods and services price inflation - well above the target 2-3 per cent target range.

In the latest half year, prices are up 1.5 per cent and the next two quarters will see overall inflation over the year at a rate above the target ceiling, rather earlier than the RBA had expected.

We do not expect the Reserve to raise interest rates at 9.30am tomorrow. It failed to do so last month and since then the news on global and Australian economic activity has been weaker. Inflation is rising in the US and therefore ultimately globally, but - at least in the March quarter - local inflation seems not to have provided the trigger.

Advertisement

And Treasury will be powerfully advocating no rate hike, with the Treasurer's and Prime Minister's overt coaching clearly in everyone's minds. Yet the dangers remain. Late last year the main risk was hubris throughout the "miracle economy".

Now the over-optimism has receded and there is a new danger. It is the major and overt difference of view between Treasury and the Reserve Bank. To this must be added the obvious leadership tension within the Government.

Internationally, the stand-off between the two most important trading nations - China and the US - is adding to the uncertainty.

Nothing worries small children so much as a squabble between mum and dad. If current leadership tensions both at bureaucratic and political levels are not soon resolved, the risks to Australia's economic prosperity will rise exponentially.

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

First published in The Australian on May 3, 2005.



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

2 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 2 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy