Standstill. We are no longer making enough jobs

SMALL CHANGE

Jobs growth per month

NSW +3800
Victoria -500
Queensland +3200
Western Australia -1000
South Australia -700
Tasmania +200

ABS 6202.0, trend figures

Australia’s jobs market is struggling to keep pace, producing an extra 10,100 jobs in a month in which the working age population grew 21,000.

Employment figures for October released yesterday show jobs growth at a virtual standstill, inching ahead at an annualised trend rate of 0.6 per cent meaning in two years Australia would have created 138,000 jobs at a time when the labour force grew 289,000.

The May budget promised half a million new jobs.

The jobs figures came as Reserve Bank assistant governor Philip Lowe told a conference in Melbourne Australia's terms of trade had peaked.

Dr Lowe told a conference in Melbourne Australia’s ratio of export to import prices was at its highest in 150 years and from here on would decline gradually. The boost to national income from mining would be less than it had been, although the benefits of high mining investment would remain for several years.

“In two years time mining investment will be about 7 per cent of the economy - that’s a staggering number. Total business investment is probably going to be at the highest share for 50 years, I don’t think there’s any other advanced economy that can be any where near that,” he said.

Jobs minister Chris Evans welcomed the news saying full-time employment had grown 20,000, but trend figures prepared by the Bureau of Statistics show the monthly growth in full-time jobs has slipped to 5200...

“ At 5.2 per cent, Australia’s unemployment rate remains one of the lowest in the developed world,” the minister said.

“The recent decision by the Reserve Bank to lower interest rates will provide greater support for consumers and businesses, stimulating growth and creating jobs.

The SEEK count of new online job advertisements also released yesterday slipped another 2.8 per cent in October, its third consecutive fall. The falls were werst in Victoria and NSW.

At the same time, the number of applicants per job slipped 1.9 per cent, suggesting some employers might be finding it harder to find suitable candidates. The fastest growing job ads were for teachers, engineers and fruit pickers.

Western Australia remains Australia’s lowest unemployment state with a rate of 4.2 per cent, although in trend terms it has been sheding workers for three months. Victoria’s unemployment rate remained steady at 5.3 per cent.

Published in today's SMH and Age


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6202.0

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Mining has jumped the shark, passed the point where it helps - study

The benefits of the mining boom have peaked, with the boom “no longer boosting growth or contributing to additional improved welfare for Australian citizens” according to a major new study.

Prepared by former Reserve Bank board member Bob Gregory and Peter Sheehan, a former head of the Victorian Treasury, the report calls on the government to abandon its promise of a budget surplus next year and calls on the Bank to cut interest rates several more times.

“The positive effects of the boom have ceased or become more muted, while the negative effects are becoming more pronounced,” Professor Sheehan writes on the opinion page of The Age today.

“The emphasis is shifting to large liquefied natural gas projects, often offshore, and the high Australian dollar is reducing the competitiveness of Australian suppliers.”

“An extreme case is the $12 billion Prelude LNG project, being built by Shell for drilling offshore in Western Australia. This involves the construction in Korea of a platform three times the size of the MCG, which will contain the drilling rig, the liquefaction plant and docking facilities. It will be towed to the gas location and all aspects of production and export will be undertaken at that location. The local content implications are minimal.”

During its first eight years the mining boom delivered increasing net benefits, the Victoria University study says... The rise in the exchange rate lifted household buying power 18 per cent as the price of imported goods fell. But the dollar has since stopped rising, removing the downward pressure on prices.

During the first five years mining share gains pushed up real estate prices and lifted household wealth at three times the usual rate. But share prices are now well down, house prices are falling and many of the big new mining projects are completely foreign owned.

Always present, the negative impacts of the are now dominating.

Professor Sheehan told The Age neither Treasury nor the Reserve Bank should be blamed for missing the slowdown at the time of the May budget. But circumstances had changed.

Reserve Bank monetary policy had been “mildly restrictive” to counteract the expected continued expansionary effect of the mining boom and runaway inflation. Neither had eventuated.

The budget was “severely rather than mildly restrictive”.

“In the context of a perceived powerful continuing stimulus from the resources boom and in pursuit of a balanced budget by 2012-13, the Government proposes to take $50 billion out of the economy over two years, Professor Sheehan said.

“Again neither of these concerns is currently relevant.”

Treasurer Wayne Swan this week recommitted himself to a 2012-13 budget surplus saying it would show Australia had the “capacity to meet the challenges of the future and to keep spending in good shape”.

Treasury secretary Martin Parkinson told an American Chamber of Commerce lunch in Melbourne the benefits of the mining boom were being spread more evenly across the Australia as services and fly-in fly-out workers were sourced from other states.

“In mining booms of the past, people would relocate to the mining sites creating towns and communities but then these would be hit severely when the boom ended,” he said.

“Nowadays, airlines are opening up new routes. Incomes earned in the sector can spent in areas which do not have an immediate exposure to the mining boom.”

Published in today's SMH and Age


Sheehan and Gregory


Download the executive summary: PDF, 101 KB

Download the full Australian Economic Report Part 1: PDF, 617 KB



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What banks do, and why they are changing what they do

Christopher Joye explains, bless him:

"At the crudest level, banks borrow money from people who want to earn a safe return (e.g., mum and pop savers and corporations that need to park cash) and lend that money back out at higher rates of interest to people that want to borrow to build or buy stuff (e.g., home owners and businesses). A bank sits in the middle and takes the “spread” between the rate of interest it pays to savers, who are actually lenders to the bank, and the return it gets from people that borrow from it.

In this way, the bank is the ultimate “middle man”, inducing people to save and borrow while clipping tickets along the way. Don't get me wrong: we need them, as the conversion of savings into loans is the lifeblood of any economy.

The fundamental problem with banks is that there is typically an enormous mismatch between the respective terms (or maturity dates) of their “sources” and “uses” of funding. When we put our money into a bank account we like to have the flexibility to withdraw that cash at any time. But the wrinkle here is that the bank then uses that money to make 30-year home loans. Blind Freddy can see that if everyone demands their cash back at the same time the bank is going to be in strife...

...The objective of the latest batch of banking rule changes is, unsurprisingly, to try and more closely match the terms associated with the banks’ different sources of funding. That is, to better align the life of a bank’s assets with the life of its liabilities. More simply stated, the regulators are saying to banks: we want you to reduce your reliance on short-term borrowings if you are going to continue to make long-term loans.

While, ironically, the shortest term of all funding sources is an “at-call” retail deposit, regulators take the view that this money can be dependable if: (1) the customer has an established transactional relationship with the bank; (2) the customer is relatively small and unsophisticated (more sophisticated investors are more likely to run during a crisis); and (3) if there is some form of government insurance or guarantee protecting depositors. That is, of course, a simplified summary.

Under the new rules, banks have to show they have enough immediately accessible, or “liquid”, cash available to cover a “bank run” over a 30-day period. So if a bunch of people demand their money back from the bank, the bank can actually pay them out.

Take our biggest bank, CBA. It gets about 60% of its funding from depositors, who are lenders to it. CBA will now have to show the bank regulator in Australia that if a significant share of its short-term funding flees because of some unforeseen financial mess-up, it has enough cash on hand to meet these repayments.

In boffin-speak this test is formally known as the “Liquidity Coverage Ratio” (or LCR). To meet the LCR, banks in overseas countries will be forced to hold – rather ironically – a certain sum of government debt securities.

The target LCR is 100%: that is, banks have to demonstrate that they can sell their liquid assets and meet 100% of the redemptions projected during a 30-day crisis. (Expect to see banks offer products with 30-day notice periods for withdrawals to cutely circumvent this rule.)

Since Australia does not have much government debt, our banks will be treated differently. Specifically, they will be able to borrow from taxpayers via the RBA in order to pay their creditors. We will, of course, charge them a fee for this service.

A second major test will require banks to show that they have a minimum amount of “stable” funding to match the longer-term loans they make using that money. Roughly speaking, these two variables will have to (sensibly) match each other one-for-one.

Once again, if a retail depositor is small, unsophisticated, and has a long-term transactional relationship with the bank, it may be regarded as a stable source of funding under the new regulations.

By understanding these new rules, you can start to work out what kinds of product changes the banks will want to make. For instance, we will likely see banks trying to attract lots of small retail depositors whom they can convert into long-term transactional clients. They will also be seeking to subtly lock customers into lending money to the bank for longer periods of time, even if these lock-ups are non-obvious.

There are already a few practical examples emerging in the market. One is the “teaser” rates that you increasingly see the likes of ING Direct, UBank, and Rabo Direct advertise. These are the opposite of the “honeymoon” rates some lenders attach to their home loans.

Teasers are all about cheaply acquiring low-tech customers who will be incented to stay in transactional accounts for at least four months. Such folks have a good chance of eventually falling into the bank’s all-important “stable” funding basket.

Along these lines, ING Direct promotes a “6.35% per annum” savings account. To be clear, you can never earn a 6.35% interest rate over any 12-month period with this product (taking as given no change to the RBA’s rate). This is because you only get the high 6.35% rate for the first four months, after which it drops down to a much lower 5% rate.

Accordingly, if you hold the account for a year, you are actually getting a circa 5.45% per annum rate, which is substantially less than ING Direct’s one-year term deposit rate of 5.7%. You are also restricted to investing a maximum of $250,000.

Rabo Direct offers a similar product. You can only invest $200,000 and get a high “bonus” interest rate for the first four months, following which it reverts to the lower standard rate.
UBank runs a slightly different “special” that gives you an extra 0.5% per annum over its basic variable rate as long as you keep adding $200 to the account every month (thereby demonstrating your long-term “commitment” to it), and on the proviso that you invest no more than $200,000.

Perhaps the most subtle product catches I have seen come with term deposits (TDs). I only discovered these traps by reading the very fine print in the terms and conditions. You see, I and most other people presume that with a TD you can take your money out at any time subject to an interest rate penalty. That is, you don’t get the higher TD rate if you pull out.

As it happens, this assumption is incorrect. In the two TDs I checked – one offered by a major bank and another supplied by a smaller one – the bank, and only the bank, has exclusive “discretion” as to whether it “allows you” to take your money out of the TD before maturity.
I had a sneaking suspicion there would be a catch like this because the banks need to show that TDs are long-term sources of funding, and that depositors cannot simply exit en masse.

In the major bank’s fine print, it says, “you may apply to the bank…to request the withdrawal or all or part of your funds prior to the maturity date. The Bank may, in its discretion, approve a request for early withdrawal”, in which case you are also charged a prepayment penalty and a fee.

This is carefully worded legalese that means the bank can, in its sole judgment, reject your application to withdraw your money (it is just not stated that way).

How big are the penalties the banks charge you if they “allow you” to withdraw your money from a TD? With this major bank, if you wanted to take out your money 20% of the way into the TD’s term, you would lose 90% of all your interest. If you withdraw 40% into the term, you lose 80%, and so on. These are very big penalties, and have a termination fee added on top.

An example of similar language is found in the terms and conditions of a TD offered by a smaller bank. They say, “We may, at your request, allow you to break your Term Deposit before maturity… You must pay a termination fee if we allow you to terminate your Term Deposit prior to its maturity.”

If this bank “allows you” to break the TD, it is then permitted to charge potentially substantial “break costs” much like the early repayment fees associated with a fixed-rate home loan. Specifically, it says:

“Break costs reflect future cash flow losses incurred by us as a result of interest rate differentials that exist between wholesale market rates applicable to the existing term deposit and current wholesale market rates applicable for the remaining period of the term deposit, adjusted to reflect a net present value. Break costs increase in line with increases in the following: interest rates, the amount withdrawn and the market margin.”

The sleight-of-hand extends to the marketing strategies used to promote TDs. Take this “screen shot” from Rabo Direct’s webpage (see below). Now what number leaps out at you? Why, a stunning 6.4% per annum interest rate? Notice that there is no asterisk next to this rate, but just the lightly shaded words in the top left-hand corner of the bold blue box. Yes, the words that attach the caveat “Up to”. Hard to see, isn’t it?

As it turns out, this super-duper 6.4% per annum interest rate only applies to Rabo’s five-year term deposit. So what is the much more popular one year TD rate? A substantially lower 5.5% per annum.

The bottom line is that banks are having to evolve their businesses. The policy objective is to make them safer and less prone to failure. This is a good thing. Just be aware that your money may be part of the solution. And all investments, event term deposits, carry risks. Accordingly, do your homework before you enter into one."


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There ain't going to be a budget surplus, nor should there be - Access

Labor’s promise of a budget surplus next financial year has turned to ashes. Access Economics says the budget will be in deficit in both 2012-13 and the election year of 2013-14, a projection it says will confirmed in the official mid-year budget update due for release shortly.

Such an outcome would open Labor to the charge that it hadn’t delivered a surplus in government in more than 20 years.

But Access has warned Treasurer Wayne Swan against “panel beating” the budget into surplus by finding billions in extra savings, saying such a “gung ho” approach would be dangerous in the current circumstances.

The May budget forecast a deficit of $22.6 billion this financial year followed by surpluses of $3.5 billion and 3.7 billion.

Access says instead it expects a mammoth $31.2 billion deficit this financial year followed by deficits of $1.9 billion and $1.7 billion in 2012-13 and 2013-14

It says the projected 2013-14 deficit will make hard for the Treasurer to artificially create a surplus in 2012-13 “by just shifting money across years”.

“They would have to actually change policy by raising taxes, fees and fines or cut spending,” Access Director Chris Richardson told The Age.

“But the economy has already weakened and events in Europe hold out the prospect of it weakening further. I don’t think that tightening into that fragility would help the economy.”

Mr Richardson said his advice applied to both sides of politics...

“Mr and Mrs Suburbs think a dollar in surplus means you’re a genius, and a dollar in deficit means you’re a dunce. Politicians of both sides have played to that. They should back off.”

“Abandoning the surplus will be a bitter pill for the government to swallow and an easy target for the opposition to attack. The government should do it and the opposition should hold fire."

The May budget forecast a jump in company tax revenue of 29 per cent in 2011-12, a projection Access thought was reasonable at the time.

But a plummeting share market and a slower than expected recovery from the floods and cyclone now mean the company tax take will only jump by around 22 per cent, an outcome Access says Mr Swan should live with.

The twice-yearly Deloitte Access Budget Monitor is regarded as the most reliable measure of government finances outside of those produced by the government itself. The Reserve Bank update released Friday also pointed to lower than expected economic growth. The Treasurer’s update is running late. For the past three years the so-called Mid Year Economic and Fiscal Outlook has been released on or around Melbourne Cup Day. This year it will be released closer to the end of the year.

Appraised of the Access report Mr Swan appeared to reject its advice saying said he remained “determined to return to surplus in 2012-13 as planned”.

“Fiscal rigour is absolutely critical at a time when global financial markets are punishing those without discipline,” he said.

Finance Minister Penny Wong also backed a surplus but told ABC television “of course if there's an impact on the global economy from the sort of turbulence and volatility we've seen that's going to have an impact on growth here in Australia and an impact on the budget.”

“We've been upfront about that. It's common sense.”

Ms Wong said the Greek parliament had “stepped back from the brink” by narrowly rejecting a no confidence motion that would have endangered its $179 billion European rescue package.

“But there is more that needs to be done, the eyes of the world are still focused on the Europeans to get on and implement the plan,” she said.

The Access report said while it did not expect a disaster in Europe, if there was one the government should be prepared to spend to stimulate the economy as it did during the global financial crisis.

“For all the unpopularity of the stimulus spending, it did its job very well. Please don’t let populism derail a new stimulus if we need it,” the report said.

Published in today's SMH and Age


NO SURPLUS

Treasury May budget forecast:

2011-12 $22.6 billion deficit
2012-13 $3.5 billion surplus
2013-14 $3.7 billion surplus

Access Economics November forecast:

2011-12 $31.2 billion deficit
2012-13 $1.9 billion deficit
2013-14 $1.7 billion deficit



Statement from Swan:

"We have been saying for some time now that global instability will inevitably have an impact on our budget, and although this makes our task a lot tougher, we remain determined to return to surplus in 2012-13 as planned.

Our fiscal rigour is absolutely critical at a time when global financial markets are punishing those without discipline, and it has given the Reserve Bank the room to move on monetary policy as we saw last week.

The hit to government revenues caused by the global uncertainty means we’ll continue making tough budget decisions to create space for the economy to grow."



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This is what the Bankers Association means when it says bank profits are "middle of the road"

From the Reserve Bank's Quarterly Statement.

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Downgrade. Your forecasts won't be met - Reserve

How Treasury saw economic growth in May:

How the Reserve Bank sees it now:

The Reserve Bank has dramatically downgraded its view of the Australian economy, throwing into doubt budget forecasts and calling into question the government’s promise of a surplus by 2012.

The sharply lower forecasts have economic growth at 3.25 per cent this financial year rather than the 4 per cent forecast in the budget, and 3.25 per cent in 2012-13 rather than the budget forecast 3.75 per cent.

The statement from the Bank says the risks to its new view are “skewed to the downside,” meaning it has little optimism the budget targets can be met.

The Age

The May budget forecast a deficit of $22.6 billion this financial year followed a small surplus of $3.5 billion in 2012-13. The Reserve Bank’s updated assessment means the government could be perhaps as much as $10 billion short as it tries to meet what are turning out to be overoptimistic profit and jobs forecasts.

The budget forecast a 28.9 per cent boost in company tax revenue. The Reserve Bank says profits are up 20 per cent and that measures of business confidence have “fallen noticeably” since the start of the financial year.

The budget forecast an extra half a million new jobs over two years. The Reserve Bank says jobs growth has slowed and will be “more subdued” than would be usual with anticipated economic growth because the mining industry is relying heavily imported equipment.

“For example, the $146 billion of liquefied natural gas projects currently underway or committed will be relying extensively on imported large modularised components.,” the Bank says.

Capital equipment imports, such as bulldozers, excavators, rubber tyres and metal structures, have climbed 75 per cent in the past five years...

Whereas the Bank had been forecasting domestic inflation well beyond its target it now expects underlying inflation to stay within its 2 to 3 per cent target band for at least the next two years.

Significantly its new forecasts use the “technical assumption” of no further interest rate cuts rather than factoring in market pricing as it has done when it believes moves are likely.

The market is pricing in four more cuts by May.

The Bank says since its last report three months ago iron ore prices have fallen 34 per cent, coking coal prices 21 per cent, copper prices 14 per cent and wool prices 10 per cent. Its commodity price index slid 5 per cent in September and October for the first time in two years.

The biggest risk to its forecasts is a meltdown in Europe. “The Bank’s central scenario continues to be one in which the European authorities do enough to avert a disaster, but are not able to avoid periodic bouts of considerable uncertainty and volatility,” it says.

A deep recession in Europe would represent “a downside risk for the Australian economy”.

Treasurer Wayne Swan yesterday acknowledged his own budget forecasts would be downgraded when he released the mid-year budget update later in the year.

“We will have less revenue than we expected when we did our Budget forecast back in May,” he told reporters in Sydney. “We’re simply not immune from the fallout of what’s occurring in the global economy. For example we’ve seen a very significant hit on our share market – that affects revenues. We’ve seen an impact on confidence – that affects revenues. There’s no doubt that as a consequence of this global instability, growth in Australia will be lower than we expected at the time of the Budget.”

Published in today's SMH and Age

Recommended reading: RBA Statement on Monetary Policy November 2011


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Iron ore down 34%, coking coal down 21% - RBA update

From today's quarterly statement:

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Welcome aboard Stephen Koukoulas

Stephen Koukoulas describes himself this way:

"I'm an economist who has never been afraid of voicing views on economic policies and financial market trends. I have unique professional experience having worked in Treasury, was Chief Economist (Australia) at Citibank, was advisor to the Prime Minister, wrote for the Australian Financial Review and led the global research team for TD Securities from London."

On Twittter he wrote that he is "not strictly an ALP supporter, just a passionate advocate of good economic policy; which happens to reside with ALP".

I hope he would agree that it doesn't always.

Reading Koukoulas is always worthwhile. Tweeting since he left the prime minister's offfice as @TheKouk, he is now blogging at stephenkoukoulas.blogspot.com.

I've added him to my blogroll --->> (near the top)

He is up there with his sparing partner, renaissance man Christopher Joye, also highly recommended.

And I've added Laura Tingle, whose Friday columns have now been freed from the AFR paywall.

Here's Stephen's latest post:

The IMF for Dummies

Mr Abbott and Mr Hockey are trying to score political points over the Government's objective of boosting funding for the IMF. The comments are at best ill-informed. I suspect they do not have a good understanding of the role and function of the IMF and when they do, they would reconsider their attack.

According to the IMF web page, "The International Monetary Fund (IMF) is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world."

"The IMF provides loans to countries that have trouble meeting their international payments and cannot otherwise find sufficient financing on affordable terms. This financial assistance is designed to help countries restore macroeconomic stability by rebuilding their international reserves, stabilizing their currencies, and paying for imports—all necessary conditions for relaunching growth."

Yet Mr Abbott and Mr Hockey are suggesting Australia should not participate in any more IMF funding and loan programs. Egad!

And for Australia's role and involvement in the IMF, this blockbuster speech from Ken Henry in 2003 is apt today.

Enough said.

Read more >>

We're spending at shops again?

Christmas is looking up. New retail figures show us returning to the shops, spending an extra 0.6 per cent after adjustment for inflation in the September quarter - the biggest jump in more than a year.

Inflation-adjusted spending on food jumped 1.4 per cent after previously growing at a trend rate of 0.3 per cent, spending on household goods jumped 1.5 per cent and spending on cafes and restaurants jumped 1.2 per cent after previously scarcely growing at all.

The big exceptions were spending at specialty clothes stores which slid an alarming 5.1 per cent, spending at shoe shops which slid an even bigger 13.5 per cent and spending at department stores which slid 2.3 per cent.

The news came as Country Road chief executive Howard Goldberg told shareholders in Melbourne sales per store had slipped 4.9 per cent since June.

Higher interest rates, increased living costs, economic uncertainty and natural disasters had dented discretionary spending.

But ICAP securities economist Adam Carr disagreed. For everything but clothes and the department stores that sold them discretionary spending was taking off.

“We are buying televisions, computers, i-stuff, the works. It looks like we are spending big except we’re not wearing clothes apparently. I’ve always been a fan of nudity, don’t get me wrong, but somehow I don’t quite think we’ve stopped dressing up... I think its the internet, which doesn’t show up in the retail figures. We are spending, it just that we don’t like getting ripped off.”

Newsagencies and book stores, also affected by on-line trading, saw sales slip a further 1.5 per cent in real terms.

The figures show widespread discounting with 6 of the 15 retail sectors identified by the Bureau of Statistics reporting lower prices. Clothing, furniture, pharmaceutical, recreational and electrical good stores all reported deflation.

Australian National Retailers Association chief Margy Osmond said she hoped the September quarter jump in sales marked "a turning point''.

"We are particularly heartened to see a big jump in household goods,” she said. “It is a reflection of the confidence Australians had that the Reserve Bank would do the right thing.''

Australian Retailers Association director Russell Zimmerman said, coming on top of already improving sales, the interest rate cut had given shopkeepers hope.

"Retailers are now looking ahead to the festive season with a glimmer of hope Santa will still come.'' he said.

Spending grew in September for the third consecutive month, increasing in all states but Victoria. In trend terms monthly spending grew most strongly in Western Australia at 0.7 per cent, quite strongly in NSW at 0.4 per cent and weakly in Victoria at 0.1 per cent after growing strongly earlier in the year.

Treasurer Wayne Swan praised the “resilience” of Australian consumers in the face of heightened global instability.

Woolworths’ decision to create more than 9000 jobs this financial year was “a stunning vote of confidence”.

ANZ economist Julie Toth said while the retail pickup was welcome it was selective and would not guarantee a good Christmas.

“We expect spending to remain subdued in December due to the continuing (or even rising) cautionary influences of the weak global economy, risks to household wealth holdings and weak employment,” she wrote to clients.

“These factors are likely to outweigh the benefits of the rate cut.”


Where we spent more...

Inflation-adjusted sales, September quarter

Sporting goods, games shops +8.6
Liquor stores +3.6
Cafes and restaurants +3.3
Meat, fruit, bread, fish shops +2.7
Pharmacies & cosmetics shops +2.6
Furniture & textiles stores +2.0
Hardware & garden supplies +1.6
Electrical and electronics stores +1.1
Supermarkets & grocery stores +1.0

...where we spent less

Takeaway food -1.4
Newsagencies and book stores -1.5
Department stores -2.3
Clothing stores -5.1
Shoe shops -13.6

Published in today's SMH and Age


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8501.0

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The European bailout, explained

This is soooooo good!



HT: Graham Matthews

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We're the most evolved, apart from Norway

Human Development

We’re second best - almost but not quite the best place in the world in which to live according to the latest United Nations human development index.

Norway pips us by a flared nostril. Australia scores 0.93 on a scale of 0 to 1 where 1 is the highest score possible. At 0.94, Norway’s margin over Australia is close to invisible.

Not so for the poorest scorer in the UN’s ranking of 187 nations. The Democratic Republic of the Congo gets a score of 0.29. The UN says the average length of schooling there is 3.5 years. Life expectancy at birth is 49 years.

The Human development index is made up of life expectancy, years of schooling and gross national income per capita. Australia scores spectacularly well on life expectancy with 82 years, second to only Japan which has 83. We are also up there with the leaders on years of schooling. The only thing Norway has that we have much less of is income. At $US47,600 per head Norway leaves Australia’s $US34,400 per head in the shade. If it weren’t for the income measure Australia would be ranked the most developed country int he world. The UN says so. It gives Australia first place in its measure of “non-income human development”.

As it happens a good many of the nations surveyed by the UN make more per head than Norway, but it finds them poor models of development. The citizens of Qatar earn $US107,700 per head, but stay in school an average of seven years. Even Singapore where they earn $52,600 per head can boast only 10 years at school.

Many of the countries we are used to comparing ourselves with perform poorly... The United States has a lower expectancy. The United Kingdom has an average stay in school of nine years.

We are among the most satisfied citizens on earth, typically giving a figure of 7.5 when asked to rate our satisfaction with life on a scale of 0 to 10. Denmark, Canada and Norway are more satisfied, but in the US and UK they are more miserable with scores of 7.2 and 7.0.

The high income residents of Qatar and Singapore would be happier here. Their satisfaction scores are 6.8 and 6.5, despite incomes up to many times ours.

Generally though happiness does follow income. The low income nations of Burundi, Hati and the Congo each have a satisfaction score of 3.8.

We are not a particularly equal society (Norway’s income distribution puts us int he shade) and far from impressive when it comes to equality of the sexes. On gender equality Australia is the 18th ranked nation in the world, behind the first-ranked Sweden, a slew of European nations, the Korea and even Italy.

Pushing us down in the gender rating is our teenage fertility rate (16 in every 1000 teenage women give birth, far more than most European nations but good deal less than the United States) and our placement of woman in parliament. The UN says 28 per cent of our parliamentary seats are occupied by women, a ranking well below Norway with 40 per cent, and New Zealand with 34 per cent.

The UN says the worst places in the world to live are in Africa. The bottom five are Chad, Mozambique, Burundi, Niger and the Democratic Republic of the Congo. Their relative positions were little changed in this survey as were those of the top five, Norway, Australia, the Netherlands, the United States and New Zealand.

Published in today's SMH






Guardian interactive map:









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Long ago and oh so far away... the budget looked good

Wednesday column

It’s just as well the banks are cutting rates. The budget is getting hammered. In May the budget forecast an massive jump in company tax revenue of 28.9 per cent.

That’s right -- around 30 per cent. The company tax take was to jump from $57.9 billion to $74.6 billion in the space of a financial year, an increase of $16.7 billion.

The reasonable-sounding argument was that profits had been bludgeoned by the global financial crisis, the high dollar and the January natural disasters and that these effects would “unwind gradually” during 2011-12.

But 28.9 per cent was more than an unwinding - it would have driven company tax to a new record high, even after adjustment for inflation.

And it wasn’t gradual. The budget papers partly explain the forecast acceleration by saying very low company tax instalment payments in 2010-11 meant that more than usual of any boost to tax would turn up in 2011-12 rather than 2010-11.

Also several tax breaks would end in 2011-12 and the budget would book “gains associated with increased Australian Tax Office compliance activities”, which would be helpful if it happened.

Superannuation tax revenue would jump as well, roaring back 29.3 per cent or $2.1 billion as the share market recovered.

Combined, these two revenue forecasts - each largely dependent on an improved economy - promised $18.8 billion in extra revenue... enough to pave the way for the paper-thin $3.5 billion surplus forecast for 2012-13.

In addition income tax revenue was expected climb 10 per cent, reflecting “anticipated growth in employment and wages”, contributing another $14.6 billion.

Only a brave or foolish person would call the Treasury over-optimistic. Its tax analysis division has 50 staff. The Finance Department’s budget group has 250 staff. They know far more about the budget position than any of their critics.

But on this occasion the economy was crumbling underneath them as the budget was published. Released in May at a time when all but three of the employment outcomes for 2010-11 were already known the budget went for jobs growth that year of 2.75 per cent. It got 2.2 per cent. For 2011-12 it went for jobs growth of 1.75 per cent. Three months in to that year jobs growth is running at an annualised 0.2 per cent.

Without an economic boost we will have 177,000 fewer Australians working and paying tax by mid next year than the budget was counting on.

Company tax has been going the same way. At budget time the government expected to collect $57.1 billion in 2010-11. It collected $56.3 billion, almost a billion less; hardly an encouraging beginning to an upward trend that was going boost company takings 28.9 per cent.

Superannuation tax earnings missed the mark by 8 per cent, also an unimpressive start to an upward trend that was going boost takings 29.3 per cent.

Since the budget the Australian share market has collapsed a further 12 per cent. The forecast upturn may be underway. The market has been improving since the start of October, but it’s too early to have much confidence.

We urgently need a financial update. The May budget was out of date within days of its release. We’ll get that update with the release of the Mid-Year Economic and Fiscal Outlook (MYEFO), an event often scheduled for Melbourne Cup Day. This year it will be later. Treasury and Finance need more time to put the forecasts together.

The mining tax will bring in should help, bringing in an officially forecast $6.5 billion by 2013-14, its second year. But iron ore prices have been heading south in recent months. The Reserve Bank’s overall commodity price graph released late yesterday was heading down for the first time in months, and it was heading down for two months in a row. The previous increase in September was revised to a fall of 1.4 per cent followed by a fall of 3.9 per cent in October.

The Bank said in the statement released with yesterday’s rate decision that Australia’s terms of trade had “peaked and will decline somewhat in the near term”.

The spending the spending to be financed by the mining tax will continue to grow. The tax concessions associated with the lift in compulsory superannuation start out costing $240 million over the next four years and balloon to $3.6 billion per year when 12 per cent super is fully operational in 2019-20.

The cost will have to be worn by the budget forever, whether or not mining has a good year.

It’s the same with the one per cent cut in company tax rate due to apply to all companies from 2013-14 and to small companies from from 2012-13.

The much heralded 2012-13 return to budget surplus (confirmed again by the prime minister in question time yesterday) looks shaky unless the interest rate cuts persuade us to spend.

There are all sorts of ways the budget could be massaged into an apparent surplus in 2012-13. Selling radio frequency spectrum and selling mortgage backed securities are two. But unless things pick up the task might become too big. It’s no-one’s fault, but things aren’t turning out the way they were meant to.

Published in today's Age





Thanks Karen



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The cash rate is low, mortgage rates are not

The graph sets it out

Two of the big four banks have passed on in full the Reserve Bank’s 0.25 point Melbourne Cup Day rate cut and the others are set to follow within days.

The cut in the Reserve Bank’s cash rate from 4.75 to 4.50 per cent will take Westpac’s standard variable mortgage rate to 7.61 per cent and the Commonwealth Bank’s to 7.56 per cent, slicing $49 from the monthly payment on a $300,000 loan.

If the National Australia Bank also cuts by 0.25 points its standard variable rate will drop to 7.42 per cent, the lowest of the big four and the first below 7.5 per cent in a year.

The Reserve Bank last adjusted rates on Melbourne Cup Day 2010, inching them up 0.25 points because of concern about inflation, but each of the big banks passed on more, the Commonwealth Bank pushing up its mortgage rate by almost twice the Reserve Bank move sparking outrage among customers and talk by the Treasurer of tough moves to reign in the banks.

Those moves mean that even though the Reserve Bank’s cash rate is back to where it was, the big bank’s official rates remain much higher, although discounting means new customers can expect a better deal if the shop around.

The Commonwealth Bank cut comes into effect Friday, Westpac’s a week later.

A $300,000 mortgage holder will be $5000 per year better off than when mortgage rates peaked at 9.6 per cent before the financial crisis and $5400 worse of than when mortgage rates hit 5.1 per cent in the depths of the crisis.

Neither of the two banks has announced a cut to its less politically sensitive business and credit card rates, each saying they are “under review”.

The Reserve Bank statement characterises the cut as a one-off... omitting the usual reference to rates remaining under review, saying instead rates are now “consistent with achieving sustainable growth and 2 to 3 per cent inflation over time.”

The bank cut because underlying inflation has moved back to the middle of its target band, allowing it to adjust setting from “mildly restrictive” to “more neutral”. Previously alarmed by the inflation outlook it is now forecasting inflation consistent with its target band for the next two years “abstracting from the impact of the carbon pricing scheme”.

The Bank believes commodity prices have peaked, taking some pressure off off the economy. Its monthly commodity price index released after the meeting was down 3.9 per cent.

The futures market is pricing in an 80 per cent probability of a further cut in December.

The dollar slid three quarters of a cent to 104.47 US on expectations of further cuts. It
lost a further cent in early European trade, sliding below 103.50 US.

“Effectively the Bank has admitted it it got it wrong,” said Commonwealth Securities economist Craig James. “In August it was set to hike rates, but it has become abundantly clear inflation is under control and financial conditions have been tighter than necessary.”

“The Bank has now moved back to a more neutral stance – that suggests rates could move either way in coming months. If rates are moving anywhere in the short term, clearly it’s down, rather than up.”

Published in today's SMH and Age





State & Territory Breakdowns



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The Reserve will cut, the banks will pass it on

Australia’s banks are flush with funds ahead of an expected cut in the Reserve Bank’s cash rate today, in a position to pass in full a saving to a typical mortgage holder of $49 per month.

Prudential Regulation Authority figures show an extra $12.3 billion was pumped into bank deposits in September as Australians sought safety amid global economic uncertainty.

Commonwealth Bank deposits were up 2.6 per cent, National Australia Bank deposits up 1.1 per cent and Westpac deposits up 1.2 per cent. ANZ deposits were flat.

The jump in deposits of 0.9 per cent is well above the growth in lending of 0.6 per cent, giving the banks an incentive to price keenly to sell more loans.

The Treasurer’s office confirmed yesterday it had phoned the heads of each of the big banks to pass on the Treasurer’s wish that they pass on any cut in full.

To further pressure the banks Mr Swan will today release new details of the way his bank switching package will work including the “Key Facts” document that will be to be every person offered a new loan from January...

The two-page document displays a total amount to be paid back which in the example given is two and half times the amount borrowed. It also indicates how much extra would be required per month if the variable mortgage rate was lifted 1 percentage point.

To demonstrate the importance of repayments it includes a calculation of how much quicker the loan would be paid off if the monthly repayment was $200 higher. In the example given the $400,000 loan is repaid in 23 years instead of 30.

Since Mr Swan banned mortgage exit fees on new loans from July 1 Treasury believes 167,500 households have taken out loans completely free of exit fees, making it easier to switch to get a better rate.

Treasury figures show the government has invested $13.8 billion in residential mortgage securities since the financial crisis, helping 20 smaller lenders raise a total of $34.4 billion for home lending, $1.8 billion of it for small business funded by mortgages.

“Our investments in residential mortgage banked securities have been an unequivocal success, ensuring a flow of funding for smaller lenders through the dark days of the financial crisis meaning they are now putting substantial extra competitive pressure into the banking system,” the Treasurer said.

The Reserve Bank will announce its decision at 2.30 pm. Several of the big banks are expected to respond immediately.

Adding weight to indications the inflation rate is low enough to justify a cut the TD Securities inflation index for September released ahead of the board meeting showed prices climbing just 0.1 per cent in September, increasing just 0.03 per cent in three months. The annualised inflation rate calculated from the past six months of data is just 1.2 per cent, well below the Reserve Bank’s target band of 2 to 3 per cent.

House prices fell 0.2 per cent in seasonally adjusted terms in September according to RP Data, to be down 3.4 per cent over the year. Sydney prices were down 0.6 per cent and 1.2 per cent annually, Melbourne prices down 0.3 per cent and 4.4 per cent annually.

In news more encouraging for the Reserve Bank private sector borrowing grew in September, climbing 0.5 per cent after increasing 0.2 per cent in August.

Published in today's SMH and Age

Required Key Facts Mortgage Form


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A $400 billion investment boom, never mind the taxes

Australia’s investment boom is picking up pace despite economic uncertainty and claims about the impact of the carbon tax and the mining tax.

Today’s Deloitte Access Investment Monitor details a record 935 investment projects planned or underway, each worth $20 million or more. The total value exceeds $894 billion, an increase of 7.5 per cent in the past three months and 16 per cent over the past year.

Leading the way are what Access calls “an unprecedented number of mega projects” - 14 worth more than $10 billion and five of those worth more than $30 billion.

“Large projects are longer term investments – they take longer to construct, and need to be in operation for longer for investors to see a return on capital,” says Access director David Rumbens. “Amid the extreme short term volatility we have seen on share markets and currency markets, a continued focus on the longer term picture by is comforting.”

Mining accounts for around one third of the $406.8 billion of projects underway and almost all of the $487.3 billion in projects planned....

Western Australia and Queensland between the account for half of the investments, led by the $29 billion Chevron Wheatstone LNG project off the Pilbra coast and and the $20 billion Australia Pacific coal seam gas to LNG project linking Roma and Gladstone. Both projects will be subject to the expanded 40 per cent petroleum resource rent tax.

“This is yet more evidence investment in mining continues to boom in full knowledge of the taxes,” said Treasurer Wayne Swan ahead of introducing the mining tax legislation this week.

Access says 34 coal projects are under way or planned, 15 of them worth more than $1 billion. Opposition leader Tony Abbott told parliament last month (SEPT) the carbon tax would close mines in northern Queensland. Access finds ten of the big coal projects planned in Queensland.

Away from mining, investment is weak. The biggest Victorian projects are the $1.2 billion redevelopment of the former Carton and United breweries site and the $1.1 billion redevelopment of the former Royal Children’s hospital. The biggest in NSW is the $2.1 billion South West rail link.

Published in today's Age


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Weekend listening - Laurie Oakes magnificent lecture

It's here:

(right click on the link below to download)

• watch now
• listen to audio [33 Mb]
• download video (mp4) [203 Mb]

If you would like more, there's now Rob Chalmers book: Inside the Canberra Press Gallery
Life in the Wedding Cake of Old Parliament House.

It's a free download from the ANU. I am several chapters in.

Rob has seen more than Laurie. A year or so back he told me (only half joking) that Laurie and Michelle were "young pups".







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Rate Cut Tuesday: Why the Bank will move

The Reserve Bank will deliver interest rate cuts worth $49 per month to typical mortgagee households at its board meeting next Tuesday.

The 0.25 point cut - the first in more than two years - will be sold as ‘a small calibration’ rather than the first in a series.

It will take the Bank’s cash rate from 4.75 to 4.50 per cent, and bring Westpac’s standard variable mortgage rate back to 7.61 per cent and the National Australia Bank’s rate back below 7.5 per cent if fully passed on.

Treasurer Wayne Swan yesterday warned the banks not to use the European debt crisis as an excuse to withhold some of the cut.

“There would be absolutely no excuse for the banks not to pass on any rate cut that was delivered by the Reserve Bank should they chose to do so, absolutely none whatsoever,” he said.

One year ago on Melbourne Cup day each of the big four banks imposed near double rate hikes after the Reserve Bank lifted rates, infuriating the Treasurer and citing increased costs. If the banks do no more than fully pass on the Reserve’s cut on Tuesday their rates will remain well above November 2010 levels even though the Reserve Bank’s rate will be back to its previous level.

Consumer price figures released yesterday dramatically revised down the official picture of inflation giving the Reserve Bank room to switch settings from ‘mildly restrictive’ to ‘neutral’.

While official inflation rate slipped from 3.5 per cent to 3.6 per cent, two of the measures most closely watched by the Bank slipped to 2.3 per cent - well within and toward the bottom of the Bank’s 2 to 3 per cent target band...

Those measures are the consumer price index excluding volatile items and so-called trimmed mean that excludes both the strongest and weakest price movements.

Whereas the Bank had been forecasting an inflation rate well above 3 per cent for the next two years its new forecasts to be released Friday week will have inflation closer to 2.5 per cent.

Bank staff believe that with inflation set to stay around the target, with economic growth at the long term trend and unemployment broadly steady there is no need to keep interest rates mildly restrictive. Lending rates are at present around 30 percentage points above their long term averages. A cut in the Reserve Bank’s cash rate would return them to near those averages.

All but two of the 12 market economists surveyed by the Herald/Age now expect the Bank to cut its cash rate on Tuesday. One, former prime ministerial advisor Stephen Koukoulas believes there’s a chance of a double rate cut.

“The only debate now is whether we get 0.25 points or 0.50 points. The inflation rate is low at a time when the global economic conditions are deteriorating. Will they do 0.25 and then another 0.25 in February or start off with 0.50 to try and make sure we don’t have anything less than a slowdown in 2012?”

Mr Koukoulas was the only market economist to correctly predict the underlying quarterly rate of inflation would be a mere 0.3 per cent in the September quarter, just half the dominant forecast of 0.6 per cent.

Most prices pressure were muted in the quarter with utility charges and holiday travel the only big exceptions. Annual price rises pushed up electricity charges 7.8 per cent, water charges 8.6 per cent and property rates 5.2 per cent. Overseas travel jumped 5.1 per cent.

Fruit prices slipped 1.2 per cent in the wake of Cyclone Yasi and vegetable prices 2.5 per cent. Milk was down 10 per cent over the year and audio visual and computing software down 20 per cent.

Published in today's SMH and Age


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Alcohol is too cheap. It's doing us damage. Plans are underway.

Wine discounting and the cheap $5 cleanskin are in the sights of an informal coalition of lawyers, health professionals, and economists who met for the first time yesterday to draw up plans to raise the minimum price of alcohol.

Convened by the Foundation for Alcohol Research & Education, the Cancer Council of Victoria and the Melbourne Law School the forum discussed ways of building on the momentum of last month’s tax summit and the effective floor price in place for the past three months in Alice Springs.

Coles, Woolworths and IGA abandoned sales of cheap casks in Alice Springs on July 1 and now sell no wine for less than $8 a bottle, setting an effective minimum price of $1.10 per standard drink.

Russell Goldflam of the People's Alcohol Action Coalition told the forum recorded assaults in the Territory had fallen 20 per cent on the same period the year before...

The effective floor price was introduced at the same time as a banned drinking register making it difficult to untangle the contribution of each measure.

Indigenous affairs minister Jenny Macklin ruled out making the floor price mandatory in her visit to the Territory last week but health minister Nicola Roxon has asked her Preventive Health Agency to “develop the concept” nationally as part of an Australia-wide move against alcohol abuse.

A split has emerged within the industry with Treasury Wine Estates and Pernod Ricard, owners of the Penfolds and Jacob’s Creek brands breaking with the Winemakers Federation to petition the tax summit to tax wine per unit of alcohol as is beer. The move would more than double the price of a four litre cask and slice 10 per cent from the price of a top range Cabernet Sauvignon.

Economist John Marsden urged the forum to be careful about the harm the measure would cause the irrigated districts of Griffith, Mildura and Renmark that produce most of Australia’s boxed wine. Michael Thorn of the Foundation for Alcohol Research & Education said the effect on the Murray Darling Basin would be positive. It took 1000 to 1200 litres of irrigated water to produce one litre of cheap cask wine.

Several lawyers at the forum warned that a national floor price would be hard to get past the National Competition Council as it came close to government-approved collusion. Retailers would keep the extra margin rather than the government, as would be the case if the tax rates were changed. The Council would need to be assured there wasn’t an alternative way to curb sales.

Dr Marsden referred to preliminary estimates suggesting excessive alcohol consumption costs Australia $37 billion per year, $22 billion of it in harm to non-drinkers. Lifting the floor price would be particularly effective in curbing drinking among young people as they already spent almost all of their income.

Michael Livingston of Victoria’s Turning Point alcohol and drug centre said the only way a national floor price would get public support would be if moderate drinkers could be assured it wouldn’t touch the price of a $12 bottle.

Published in today's Age


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Evidence: Stimulus spending creates jobs

Delightfully, it is evidence from a Coalition program

It’s been one of the most fiercely-fought debates of financial crisis, conducted mainly in the absence of evidence: Do government stimulus programs create jobs?

The Coalition has derided Labor’s stimulus programs as “wasted money”. Labor says without the tens of billions it spent building school halls, insulating home roofs and sending cheques to taxpayers Australia’s unemployment rate would have skyrocketed.

Today the journal Economic Letters, publishes an attempt at an answer.

Economists Christine Neill and Andrew Leigh have been able to do what those before them have not: measure the effect of stimulus spending on individual regions by comparing those that received stimulus dollars with those that did not.

Christine Neill is an Australian at Wilfrid Laurier University in Canada. Andrew Leigh was until recently an economist at the Australian National University and is now a Labor MP. He completed the research while at the ANU but the long delays in the journal process mean it has only now been published.

The usual problem in such a study is finding a controls - regions as economically depressed as those that received government payments that had to make do on their own...

It can’t be done for Labor’s stimulus payments. They went to all Australians who fitted the financial criteria and to all regions throughout the country.

But Dr Leigh discovered this wasn’t the case for an earlier program run by the Coalition.

The so-called Roads to Recovery program begun in 2001 directed money for roads to some local councils and not to others.

Dr Leigh found “clear evidence” the money wasn’t evenly directed to regions that needed it. Electorates held by Liberal and National MPs got more funding than those held by Labor.

By using the poorly funded but economically-similar Labor electorates as controls he was able to work out what the big licks of money directed to National and Liberal electorates actually did.

His finding: a 10 per cent increase in stimulus spending in an electorate creases an extra 26 to 78 jobs. The cost per job amounts to $10,000 to $31,000 over a three year period.

“That’s not that expensive,” Dr Leigh told The Age. “At times when the economy is depressed such as during the global financial crisis you would expect the effect to be bigger.”

“As far as I know we are the first to use this method. It has gone through the peer-review process in an internationally recognised journal, so I think it can withstand criticism.”

Published in today's Age


Email from Christine Neill:

If you want to know whether in some particular instance government spending can reduce unemployment, you've got to worry about the fact that an increase in unemployment often causes government spending to increase (eg welfare spending, etc). So if you just look at correlations in the raw data, you will often find that higher government spending is associated with higher unemployment. In econometrics terms, there's an endogeneity problem. There are all sorts of techniques used to get around that problem in the macroeconometric literature (policy experiment case studies (wars studies), vector autoregressions, or various calibration-type techniques). All are somewhat contentious. A typical microeconometric approach is to find an instrumental variable - in this case, something that is correlated with a change in government spending, but that is not itself likely correlated with a change in unemployment. Here, we used politics. Previously, Andrew Leigh had found that electorates with (then government) National/Liberal reps got more spending in the Roads to Recovery program. We find that those electorates also had a bigger drop in unemployment than other electorates, suggesting that the higher spending in an electorate via Roads to Recovery led to lower unemployment in that electorate. While you can't extrapolate from this to overall fiscal policy effects (including because you wouldn't expect any crowding out via higher interest rates, which is a concern with national-level fiscal policies), it is interesting that in even a very small jurisdiction government funded local infrastructure spending seems to be sticky, and to increase local employment.

There are a couple of other recent papers that try to take the same basic econometric approach: Nakamura and Steinsson: "Fiscal Stimulus in a Monetary Union: Evidence from US Regions" (uses military buildups in particular regions); and perhaps more interestingly: Mafia and Public Spending: Evidence on the Fiscal Multiplier from a Quasi-Experiment (this one is somewhat closer in spirit to our paper). They both have fairly similar findings, of quite large effects of government spending at the local level.



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A good CPI gets that little bit more likely

ANZ prediction

Australian shares have gained $35 billion and the dollar has hit a six-week high amid hope of a workable stability plan for Europe and news of a boost to manufacturing in China.

Manufacturing in China hit a five-month high in October according to the usually-reliable HSBC purchasing managers’ index. The index stood at a preliminary 51.1 in October, up from 49.9 in September and the first time it has gone above the neutral level of 50 since June.

The final PMI reading for October will be released as Australia’s Reserve Bank board meets to set internet rates on Melbourne Cup Tuesday, November 1.

HSBC economist Qu Hongbin said the news suggested China’s economy would escape a hard landing, despite slowing export growth and tighter credit conditions.

The turnaround was led by export orders, most likely to the United States after the settlement of its debt ceiling crisis.

“It gave the currency a kick along, taking it past 104 US cents,” said CMC Markets dealer Tim Waterer. The Aussie dollar closed up one and a half cents.

The S&P/ASX200 index climbed 113.1 points, or 2.73 per cent, to 4,255 points. The All Ordinaries index climbed 110.2 points to 4,313.6.

Markets were also optimistic about a settlement of the European debt crisis this week with eurozone leaders scheduling another meeting for Wednesday. “We haven’t got the result at this stage, but it appears from the rhetoric they are progressing in the right direction,’’ said Mr Waterer.

At home the odds of a Melbourne Cup Day interest rate cut advanced with the release of a benign-looking producer price index.

Traditionally released two days ahead of the consumer price index, the index showed prices rising at a quarterly pace of 0.6 per cent and an annual rate of 2.7 per cent...
The results are well down on the June quarter readings of 0.8 per cent and 4.3 per cent, and suggest producer prices will add little to consumer inflation.

But the relationship between the two indexes has become loose in recent years as consumer prices have increasingly come to depend on wages and margins as well as the price of inputs.

Domestic producer prices climbed 0.7 per cent in the quarter and imported prices were flat after falling 19 per cent since the first quarter of 2009 as the Australian dollar rose.

House construction costs, heavily represented in the consumer index, fell 0.2 per cent in the September Quarter. Utility charges jumped 8.2 per cent as annual increases kicked in. Encouragingly the increase was below the 8.9 per cent recorded in the 2010 September quarter.

“We have raised out headline CPI forecast to 0.7 per cent, but cut our underlying inflation forecast to 0.6 per cent,” said RBS economist Kieran Davies. “A 0.6 per cent result would probably see the Reserve Bank cut.”

The Bank believes interest rate settings are mildly restrictive and will return them to a more neutral setting if Wednesday’s CPI result allows it point to continuing low inflation.

Published in today's SMH and Age


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