Wednesday, September 08, 2010

And guess what? The economic seas look calm...

...for once, for now

The Reserve Bank has presented the incoming government with an glowing picture of the economy arguing near-perfect conditions are likely to continue for about a year.

In a statement released after the Bank's Adelaide board meeting likely to reflect the briefing that will be given to the prime minister Governor Glenn Stevens said the economy would remain strong as stimulus measures were withdrawn, with private spending taking the place of government spending.

Whereas "high levels of public spending" had helped keep the economy growing at its long-term trend over the past year, in the year ahead the work would be done by private income and spending boosted by the mining boom.

Record prices for Australia's key exports had pushed Australia's terms of trade past their previous peak. They were already boosting incomes and were set to "strongly" boost business investment.

While credit conditions for some businesses remained difficult, evidence was "slowly emerging of more willingness to lend".

With inflation contained within the top half of the Bank's target zone it sees no need to increase rates in the near term, all the more so because there are signs of international growth slowing, potentially moderating Mining Boom Mark II.

The picture painted is that of Goldilocks economy... neither too hot nor too cold for the foreseeable future, giving the Gillard government breathing space of kind denied to its predecessor.

Access Economics forecasts released this morning  point to retail sales growing strongly in the year ahead boosted by the 350,000 additional jobs created in the past year.

"Consumer confidence has lifted in recent months on the back of pauses in interest rates and the rising dollar," said Access director David Rumbens. "The Reserve Bank may keep rates where they are for a few more months giving retailers some breathing space in the lead-up to Christmas."

"But we still do expect some further rate rises to occur over the next year, and the recent spectacular rate of jobs growth to moderate from here. That means good retail conditions may be ahead, though still well shy of previous booms."

Access predicts outsized real spending growth of 5.2 per cent in Victoria this financial year with NSW growth a more moderate 2.6 per cent reflecting Victoria's much faster employment and population growth.

It warns that the smaller population targets embraced by both sides during the campaign should slow sales growth with half the sales growth in recent years being due to population.

Lower targets might also drive up the cost of workers. "Retail may be particularly exposed in terms of supply of part-time workers if there is a sharp reduction in the number of international students coming to Australia," Mr Rumbens said.

Financial markets took news of the new government in their stride with the Australian dollar falling from 91.5 to 91.2 US cents and share prices at first falling then retracing losses to close flat. Bond fell then recovered.

Published in today's SMH and Age

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