Background is at PD Jonson's The economic outlook, 2006

The previous item in this series is linked here: Australian Economy, Q3 2006

Tim Harcourt, Chief Economist at Austrade, provides his outlook here: Australia`s 2006: Global Times, Global Measures

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Henry, 21/12.  The RBA's monthly Bulletin is released today, which includes economic commentary, feature articles, speeches and a set of statistical tables by the gurus over at the RBA - aficionados of central banking take notice.

Henry, 20/12.  According to the Westpac/Melbourne Institute's leading index of economic activity, released today, the Australian economy is likely to experience strong growth in the coming months.

The index jumped 5.8% on an annualised basis in October, after a 3.6% increased during September.

The leading index purports to predict economic activity in the next three to nine months, and it has stayed a steady one to two percent above the trend rate over the last four months – indicating that the economy is far from slowing (as the national account figures hint), but is actually expanding.

Westpac chief economist Bill Evans said the index predicts that the coming months will “be marked by steady growth in consumer spending; some slowing in housing following another rate increase early in 2007; stable business investment; strong government spending and, most importantly, a sharp pick up in export growth as the benefits from the investment boom in mining really start to pay off".

"The unemployment rate is likely to stay near 30 year lows and consumers may respond more positively to an extended period of steady interest rates following the final expected rise early in 2007," he said.

"Strong underlying demand may offset the impact of higher rates on the residential construction cycle, particularly in NSW where the building downturn has been most severe."

Henry, 18/12.  The latest ABARE minerals exports forecast is out today, and if you’re interested in the short-term future of the economy, it makes interesting reading.  Click here to view the report in pdf format.

The report forecasts that the increases in mineral prices will more than outweigh the drought-induced reduction in farm exports.

ABARE forecasts that increased prices in gold, iron ore, nickel and copper will increase Australia’s earnings from minerals by 31% to reach $69.3 billion in 2006-7.  However, they do assert in the report that there are capacity constraints stopping the mining industry operating to its full extent.

Farm production is now expected to fall by 21.3% this year due to the drought.

Henry, 13/12.  Thank goodness, someone - a fairly important someone - is worried by Australia's ballooning levels of debt.

The someone is new RBA governor Glenn Stevens.  The occasion was a CEDA dinner in Marvellous Melbourne.  "Finance and growth go together. It was no accident that the acceleration in growth in the industrial revolution was associated with the development of modern banking and capital markets.

"By the same token, disruption to the financial sector is costly to the real economy, as is only too clear in history. The role of public policy is to respond to these disruptions forcefully if and when they occur to preserve the stability of the system, but in the good times to work hard at fostering a climate of careful risk assessment in the relevant institutions and markets.

"For the past 15 years or so, the financial system in Australia has worked remarkably smoothly to assist the economy.  A very large change in the household sector’s balance sheets has made households more sensitive to changes in their circumstances, but financial institutions have continued to perform strongly.

"The challenge remains for these institutions, and all of us, to understand how risk is changing in this new environment, and to remain aware that we may at some stage face less forgiving circumstances than we have enjoyed over the past decade. We need also to be alert to the shift in the wind in the area of corporate leverage that seems to be occurring. I suspect we will be talking about that for some time to come.

"In the interim, I wish all of you a merry Christmas and a happy, prosperous – and stable – new year".

Read the full monty here.

Henry, 11/12.  Petrol prices are once again on the march.  With the price of a barrel of oil jumping $5 in recent weeks, the resultant petrol price rise is likely to cause some pain in the run-up the Christmas. 

After sitting around $1.10 per litre for a couple of months, petrol prices have recently increased by up to 6-7 cents a litre.  This trend is likely to continue as OPEC are meeting next week and are likely to implement another production cut to keep the oil price above $60. Are the guys who run OPEC on Santa's Good List?

Henry, 11/12.  Friday’s positive jobs growth news in the US has given the US dollar support at it’s current level.  According to the Labor Department, the U.S. economy added 132,000 jobs in November after a gain of 79,000 workers a month earlier – a much higher result than the 100,000 jobs that was expected.

As expected, this strong jobs growth has given the optimists some support, as they see the economy powering ahead despite the lull in the housing sector.  Accordingly, interest-rate futures traders decreased the odds of the cut in interest rates to about 40%, down from about 100% earlier in the week.

Holding US interest rates where they are will, at least in the short-term, halt the slide in the value of the US dollar.  As a consequence, the Aussie has fallen half a cent from the peak of around 89 US cents last week.

Henry, 9/12.  At last, some uncommon sense about the Future Fund.  Alan Wood argues: "Income tax cuts beat parking our money in Future fund".  But the nanny state is alive and well.  And its not as if the Future Fund is there to help taxpayers - essentially its main aim is to enable the government to meet currently unfunded public service/pollie superannuation liabilities.

As Woodie says: "Implicit in the Future Fund is an assumption that Australians, left to their own devices, would not use future tax cuts wisely - that they would be more likely to buy plasma TVs than shares or bonds".

Henry, 8/12.  Despite an interest rate rise in early November, the Roy Morgan Consumer Confidence Rating is up 5.9 points to 117.4 in its December rating.  This month’s rating of 117.4 is 12.2 points above the December average of 105.2 and 1.5 points above the 2006 average of 115.9.

This week was a busy week for economic statistics. Here’s a brief overview:

• Gloomy housing statistics: Building approvals plunged 7.4 per cent to 12,214 units in October to be 1.8 per cent lower than in the corresponding month last year.

o The number of loans to owner-occupiers to build or buy homes or apartments dropped 0.1 percent from September to a six-month low 61,819.

• ABS statistics show that our net foreign debt has sharply expanded, with Australians now owing foreigners $522 billion.  That means that Australia's net foreign debt rose 5% in the September quarter, from $499.543 billion in the June quarter and $446.103 billion a year ago.  It's the first time our net foreign debt, the amount we borrow minus the amount foreigners borrow off us, has reached half a trillion dollars. 

• The GDP growth figure came in at just 0.3% for the September Quarter in seasonally adjusted terms (2.2% year on year, after the ABS revised Second Quarter upwards to 0.5%).

• The nation’s unemployment rate remained at a seasonally adjusted 4.6% in November, with total employment growing by 36,200 to 10.289 million.

These apparently contradictory figures make analysis difficult – there is a slight housing slowdown underway, the CAD and foreign debt remain far too high, GDP growth is slowing, unemployment is at 30-year lows while consumer confidence is showing renewed strength. Que?

Henry, 7/12.  Employment growth has once again far outstripped forecasts, putting paid to the idea that we could be in for interest rate cuts in early to mid 2007.

The nation’s unemployment rate remained at a seasonally adjusted 4.6% in November, with total employment growing by 36,200 to 10.289 million.  All of this employment growth was in full-time employment, which increased by 57,400 to 7.362 million while part-time employment actually decreased 21,200 to 2.926 million.  The participation rate grew strongly to 64.8%, from a revised 64.6% in October.

Economists had been expecting employment to increase by 10,000, and the unemployment rate to jump to 4.8%.

This result is therefore a surprise to most economists (but not Henry), and will no doubt put an end to the peddling of economic doom and gloom that has covered the business pages since yesterday’s national account figures.  But this also raises the question of stagflation - economic growth has slowed, but capacity constraints are still being pushed to the limit - how long until this turns into wage-driven inflation?

Adding to the fears is that Australia's economy is entering stagflationary season is the fact that the 2.2% annual GDP growth is overwhelmingly driven by the commodity boom - every other sector of the economy is flat.  Yet employment is booming and inflation is uncomfortably high.

Henry, 6/12.  After they met yesterday (which was sure to be a short meeting, with the test to watch), the RBA has followed Henry's advice and left the cash rate target unchanged at 6.25%. 

As Henry warned yesterday, there is a risk the Australian economy may be in for a bout of stagflation. National Account figures released today by the ABS further highlight that potential.  Following on from yesterday’s worse-than-expected Current Account Deficit figures, today’s GDP growth figure came in at just 0.3% for the September Quarter in seasonally adjusted terms (2.2% year on year, after the ABS revised Second Quarter upwards to 0.5%).  This result was slightly lower than median market expectations, but higher than some pessimists feared.  

Cossie reaction went thusly:

"The September quarter national accounts show signs that the expected transition in the composition of growth from investment to exports is taking place...However, in the period ahead growth is likely to remain modest, reflecting the effects of the severe drought."

Henry, 5/12.  In some much-needed good news on the trade front, Australia's current account deficit fell in the third quarter thanks to a fall in imports and the continued good prices we are receiving for our mining shipments.

In seasonally adjusted terms, the deficit on goods, services and investment narrowed to $12.08 billion from a revised $13.29 billion in the second quarter.  Although this is a positive result, a Bloomberg News survey of 24 economists found a median estimate to be for an $11 billion deficit.  Although it is a better figure than the June quarter result, it is still the eighth largest CAD in history.

Other ABS statistics show that our net foreign debt has sharply expanded, with Australians now owing foreigners $522 billion.  That means that Australia's net foreign debt rose 5% in the September quarter, from $499.543 billion in the June quarter and $446.103 billion a year ago.

It's the first time our net foreign debt, the amount we borrow minus the amount foreigners borrow off us, has reached half a trillion dollars. 

Henry, 4/12.  For the 11th successive month, the Olivier Internet Job Index is up strongly, prompting more suggestion that this year’s three rate hikes have failed to slow the economy, and that there is likely to be more to come.

The leading employment indicator recorded a 1.58% increase. There were 260,171 jobs ads counted on the major job boards, a new record and it is the 11th monthly increase in the seasonally adjusted index.

“The jobs market usually takes a breath after an interest rate rise, but business had already taken the rise into account, “ says Robert Olivier.

While the 1.58% increase is down from October’s 7.52% rise, it shows the extent to which the labour market is booming. The real question now is how much the booming labour market will add to inflation. The tight labour market and the skills shortage have failed to add much pressure to wages so far, but that trend is likely to change.

The graph showing the growth in the Olivier Internet Job is below.

Henry, 4/12.  Research released today by Cannex found that Australians are giving their credit cards a full workout in the run-up to Christmas.  Cannex found that Australians are likely to spend more than $17 billion in December – meaning a whopping $1,300 for each of Australia’s 13.1 million credit cards.

While this spending boom follows a similar trend to previous years, Cannex says that this year the levels are far inflated from previous years:

"For the past three years, Australia's annual pattern of credit card usage has been predictable, with spending soaring in December as credit cards are well and truly given a workout," Cannex research analyst Garfield Wright said.

"This year, though, the figure will be through the chimney and well into the $17 billion realm."

Henry, 1/12.  Commodity prices rose again in November, according to Reserve Bank figures released today - linked here.

Tourism is a crucially important issue for the Australian economy – and if we are to make the most of our natural advantages, it will only become more important.  This is the reason we must take heed of some interesting results of a survey of industry representatives conducted by Roy Morgan Research.

According to the survey results, world instability and high oil prices are the pressing short-term concerns of tourism industry representatives, while climate change is the biggest long-term challenge facing the tourism industry.

The latter is of great important to the Australian tourism industry due to the nature of our nature; the pristine natural environment, including rainforests, reefs, coasts and alpine regions are all under threat from climate change.

Tony Charters, Convenor of the Tourism Futures Conference explains:

“Climate change as an issue has had a meteoric rise in awareness.  Two years ago it wasn’t on the list.  Last year it rated as the fifth most important challenge.  This year climate change is seen as the single greatest challenge facing the tourism industry over the next 10 years.”

Yet another reason to take action – our economy depends on it.

Click here for more on the Tourism Futures National Conference.

Henry, 1/12.  If you would like some bedtime reading (as in, it will put you to sleep) and you are interested in the state of the economy, get the printer warmed up - this month's ABS Compendium of Economic Statistics has been released.  Click here to read this riveting material (pdf) - Henry's mouth is watering.

Henry, 30/11.  A busy day on the economic front, with October retail sales and private new capital expenditure and expected expenditure for the September Quarter being released by the ABS, as well as lending to Australian consumers and businesses by banks and other financial institutions statistics released by the RBA.  The overall picture painted by these stats was of an Australian economy bursting at the seams.

Australia's retail sales rose 0.8% from September driven by ongoing low unemployment, relatively low petrol prices and the Government’s May tax cuts.  This of course paints the OECD’s forecast of mid-2007 interest rate cuts as a touch pre-emptive.

The strong retail sales also show the extent to which Australians have shaken off this year’s three rate hikes.

Adding to the picture of a strong economy was the investment statistics – according to ABS estimates, companies boosted their capital spending plans for the year to June 30 by 9.8 percent from an estimate three months ago.  Much of this booming investment is linked to the commodity boom, of course.

Finally, according to RBA statistics, lending to Australian consumers and businesses by banks and other financial institutions rose by 1.1% in October from September. Lending to businesses climbed 1.6%, equalling the highest growth rate of the past year.

For the year to October, total credit rose by 14.7%.  Over the month of October, M3 grew by 1.7% and broad money by 1.3%. Over the year to October, broad money rose by 12.9%.

Henry, 29/11.  According to Australian trade deficit figures released today by the ABS, the trade deficit ballooned out to $1.26 billion in October, from a revised $728 million in September.  The main drivers behind the significant deficit were increasing imports of machinery and consumer goods, which easily outpaced the gains in mining exports.

Exports rose 2 percent and imports climbed 5 percent.  This result was well and truly above expectations - a Bloomberg News survey of 24 economists found the median expectation was for a $1.07 billion deficit.

This is a disappointing result yet again for Australia’s exporters, who are failing to capitalise upon record commodity prices brought about by the booming Chinese and Indian economies by increasing trade volumes.

With the drought beginning to take effect as the summer harvest season begins, one would expect this trend to only get worse.

Henry, 28/11.  There is a great old saying that goes “You can teach a parrot to be an economist by teaching it to say supply and demand”.  While obviously an exaggeration, it’s true that our economic institutions, such as the RBA and Treasury, operate under relatively hush-hush manner, meaning that we often see huge misconceptions in our media about basic economic realities. The inflationary pressure of bananas earlier in the year is a perfect example.

To a large extent, it is Henry’s aim to write about economics in a simple manner to break through the veil of secrecy. Therefore, he is pleased to read a great speech on underlying inflation by the RBA’s Head of Economic Analysis Department, Tony Richards.

In the speech, Richards does a great job in explaining, in simple terms, the importance of accurate measures of underlying inflation:

“The task for central banks is to try to look through the short-term noise in the data and decide what part of the observed price changes is likely to be persistent and to have implications for future inflation and for the goal of medium-term price stability. The Reserve Bank’s objective is to keep consumer price inflation between 2 to 3 per cent, on average, over the cycle. The objective is clearly in terms of the overall CPI. But measures of underlying inflation provide information that help to achieve this objective.”

“Recently, we have had a very clear example of noise in the Australian inflation data. In particular, following the destruction of most of the national banana crop earlier this year in Tropical Cyclone Larry, banana prices increased by around 400 per cent. When an item has a price increase of that magnitude, it can have a very large impact on the CPI, even if it has only a very small weight in the overall CPI. Estimates suggest an impact of around half a percentage point on the CPI in the June quarter and a bit more in the September quarter."

“In addition, world oil prices have been contributing to significant volatility in the annual headline rate. Headline inflation has recently been close to 4 per cent. But it would not be surprising to see a rate with a two in front of the decimal place relatively soon, as falling petrol prices flow through into the CPI data. Assuming world oil prices remain around current levels, we cannot rule out the possibility that the headline rate might even have a one in front of the decimal place, by around mid 2007, when falls in banana prices are also included. Once those shocks themselves pass, headline inflation would then be expected to return towards the level of underlying inflation.”

However, the different measures of underlying inflation obviously do different things to the more volatile “outliers” such as fuel and food.  For this reason, there exists ongoing debate about which is the best measure of inflation and, indeed, this can change over time. Richards goes on:

“Some central banks have focused mostly on exclusion measures, but others have looked more at headline inflation. One justification for the latter position is that rising oil prices have been caused in large part by the growth in demand for oil from China and other emerging markets. But the growth of these countries has also resulted in falls in prices of a range of manufactured goods, and it may not be appropriate to leave out one effect that is boosting headline inflation while leaving in the effect that is reducing inflation. Fortunately, trimmed means can deal even-handedly with these two effects, by down-weighting potential outliers at both ends of the distribution.”

“All in all, it is unlikely that any single measure of underlying inflation can be held up as the ‘best’ measure at all times and in all countries. The relative usefulness of different measures may change depending on the nature of the shocks. Indeed there may be particular shocks that come along that are not handled well by any of the existing measures. This suggests that central banks and other analysts should look at a range of measures when assessing developments in inflation. Trimmed mean measures, calculated to reflect the characteristics of the distribution of price changes within each country, are likely to be a useful part of this exercise, but there will be no substitute for detailed analysis of all the forces driving the CPI at any point in time.”

Henry could not have said it better himself.

Henry, 27/11.  It is becoming apparent to all and sundry that the Government has missed the boat on serious taxation reform – both Access Economics and BIS have warned that further tax cuts next year would place undue upward pressure upon inflation and interest rates, and thus be economic and political suicide.

The Access Economics report, released today, found that budget forecasts are likely to fall well short of the $1.8 billion this year and $2.3 billion next year estimated by treasury.

This fall will largely be due falling profit margins and higher wages, and a fall in the profitability of the commodity sector.

Access Economics were far from impressed: "The big lift in commodity prices in the past four years has allowed Treasurer Peter Costello to keep pulling rabbits out of his hat. But those of you waiting to see him do the same when the budget figures are updated for the mid-year review will be disappointed."

BIS Shrapnel chief economist Frank Gelber argued that if the Government cuts taxes again, they are effectively hiking interest rates:

"Our estimates suggest the cash flow effects of higher debt costs will be largely offset by the boost to incomes from surging employment, rising wages and tax cuts…This increases the likelihood the RBA will have to raise interest rates again, and by more than just another quarter of a per cent."

Henry was also interested to read the results of his reader survey asking “What should be the priority for using the Federal Government’s massive budget surpluses?”  With 124 votes in, the results seem to echo the assertions of Access Economics and BIS

Save it – ie run very large budget surpluses - 12.90%
Spend it on worthy causes such as more spending on science, teachers, health, etc - 37.10%
Continue/accelerate cutting rates of income tax - 15.32%
All of the above - 34.68%

While no answer was the overwhelming winner, the relatively low result for “Continue/accelerate cutting rates of income tax” is fascinating.  Tax cuts are usually the most popular vote winner for Governments, but only 15% of Henry’s readers thought that would be the most effective way to spend the massive budget surplus – they know that it will only lead to more interest rate hikes.

It is disappointing to say the least that four years of bursting federal coffers has given us small marginal tax cuts and uncomfortably high inflation – much more should have been done.

Henry, 24/11.  The attempted Qantas takeover raises some important questions about foreign ownership and national interest – but perhaps the most interesting aspect of the potential deal is rise and rise of private equity deals.

According to the rightthinker, “Private equity firms are simply firms who seek and acquire underperforming businesses using significant leverage (debt) with the intent of turning them around and on selling the business at a profit to someone else.”

“The problem in Private Equity is that the more money you get from investors the more deals you have to find. If you do not do the deals and put investor money to work you have to return the money.”

Henry is surprised by the move to takeover Qantas – the perennially profitable airline with one of the highest-regarded CEOs around. In fact, Henry would be surprised if the deal will go ahead with the questions over national interest being bandied about by our politicians, but stranger things have happened.

Henry, 22/11.  The NAB has just released its state-by-state outlook for the Australian economy - the results are quite compelling:

• NSW continues to under perform and prospects of a marked improvement remain limited with interest rates rising, the $A at high levels, and poor seasonal conditions. The state’s industries are still coming under increased international competitive pressures, making it more difficult for households to cope with high debt levels and housing prices. This has been driving out residents and slowing population growth – further undermining growth prospects.

• Victoria is similarly placed to NSW; however, its housing boom didn’t quite go so far relative to household incomes. Thus interstate resident flows are more or less in balance, migrations rates are stronger, and the state’s performance is closer to the national average.

• SA’s performance has been impressive by its standards – managing to keep up with Victoria, with a recent boost from additional migrant flows.

• Tassie looks quite similar to SA, with improved population growth and some exposure to the commodity boom underpinning better performance.

• Queensland has been benefiting where NSW has not – receiving the residents leaving that state, and driving significant population growth. With this and its mix of tourism and resources, the state will almost always outperform. With that said though, southern rural areas are deep in drought.

• WA’s industries are taking advantage of the commodity boom, which is also driving a housing boom. Thus the state is outperforming by almost every measure. Increasingly we are concerned however that the household sector will be very stretched when the current resource boom looses some momentum.

• NT’s economy is similar to that of WA and is also outperforming by almost every measure; however, its commodity-driven boom has given way to exports (which is less stimulatory than the construction phase), bringing the Territory back towards the national average.

• The ACT is outperforming, boosted by Federal Government stimulus (via earnings and jobs) – indirectly from the commodity boom.

Henry, 21/11.  A new survey of small businesses out today shows that pessimism is increasing amongst the economy’s engine-room.  The St George-Australian Chamber of Commerce and Industry (ACCI) Small Business Survey found economic conditions to be slowing during the third-quarter – although sales revenue growth reached an all time high.

The survey of 1,681 small business owners showed a survey index of 55.6, down 0.9 from the second quarter.  However, as an index level above 50 indicates expanding business conditions, the results show that there are far more optimists than pessimists among the small business community.

Looking ahead, small business expect the December quarter to improve with an index reading of 57.1.

Henry, 20/11.  Putting the controversy of the small group of violent protesters at the G20 meeting in Melbourne aside for a moment, it is necessary to consider what was actually discussed at the meeting.  The RBA helpfully posted three papers on their website that give some background information.

- Global Energy and Minerals Markets (PDF)
- Demographic Change (PDF)
- Reform of the Bretton Woods Institutions (PDF)

Henry implores his readers to dowload these short papers, and get some real insight into these controversial discussions.

Henry, 16/11.  Consumers, it seems, must read Henry Thornton.  The Melbourne Institute's November survey of consumer inflationary expectations found that only 14.5% of consumers believe that the RBA are able to curb inflation within the 2-3% comfort range in the short term – down from 19% in both September and October and well below the 12-month average of 18.6%.

The Age reported: "The median expected value of inflation rose to four per cent in November from 3.4 per cent in October"

Whilst this is obviously not a reliable measure, it does give an indication that the Australian public consider interest rates to be on the rise.

If they read Henry carefully enough, they’ll be calling for at least another couple of hikes yet as well.

Henry, 16/11.  Henry is pleased to hear that climate change is high on the agenda at the APEC meeting currently being held in Vietnam.  In the words of our beloved leader:

“This year's APEC meeting has more than the usual significance not only for all the participating countries but for Austrailia,” he said. “It is a great opportunity to discuss co-operation in the region on climate change.

“I will discuss with all those with whom I have bilateral meetings, starting with President Bush and President Hu Jintao of China, climate change and energy security issues, which are linked.

“It's also an opportunity to renew our commitment as a group of countries to the trade liberalisation goals of APEC.”

Deputy PM Mark Vaile outlined ethanol-blended biofuels as one of the central tenets of the attack on climate change:

"It's like putting solar panels on your roof, you can put 10 per cent ethanol-blended fuel in your car every time you fill it up and reduce greenhouse gas emissions."

Gadzooks! Firstly we have Treasurer Peter Costello suggesting that Australia may join a credible carbon trading scheme, and now it appears we may be getting somewhere with biofuels – we’re getting somewhere folks!

Henry, 15/11.  The latest Wage Price Index figures, released today by the ABS, show wages increased by 0.8% in the September Quarter, and 3.8% through the year.  Predictably, the lucky devils working in the public sector received an average of 4.2% annual pay rise, while the private sector received an average of 3.8%.

The Wage Price Index gives an indication of the extent to which wage inflation will add to overall inflation.  With headline inflation running at 4% and 3.9% for the last two periods respectively, the answer seems to be “not much”. But, of course, we must recall the comment of RBA Governor Glenn Stevens that labour costs can rise in ways not captured by the wages data.

Henry, 14/11.  Following a mid-year decline, business conditions - according to the NAB's October Business Survey released today - are strengthening in the lead up to Christmas. 

Here are the key findings:

• Business conditions improve 4 points to + 18 – and are now trending up;
• Capacity Utilisation up 1.7 points to 83.5 per cent – more than reversing last month’s fall;
• Improvement in conditions broad based – with particular new strength in retail / wholesale;
• Recent strengthening in conditions most evident in NSW and Victoria;
• However business confidence unchanged at +6 in September – after falling significantly recently;
• Forward orders also remain subdued – up a point to +2 overall;
• Exports and investment intentions broadly unchanged. But last month’s run up in stocks reversed;
• Wages growth broadly still well behaved – at an unchanged annual rate of 4.75 per cent; and
• Retail prices still contained but still high purchase costs increasingly putting pressure on margins.

NAB’s Economic & Financial Forecasts:

• NAB’s Economic and Financial Forecasts unchanged - GDP 2.25 per cent in 2006/07 & 2.5 per cent in 2007;
• Core inflation still expected to peak around 3.25 per cent at end 2006 & not back to target till mid 2007; and
• Official rates now on hold – as RBA assesses the impact of past tightening and global slowdown.

Henry, 13/11.   Last week we got the bottom line of the Reserve Bank's decision.  Now we have the more detailed "Statement on Monetary Policy".  While there are no great suprises, this is the usual "good read" and provides additional insight into the thoughts of the gnomes of Martin Place.

The key paragraphs are these: "Australia’s economic expansion has now reached a mature stage in which previously unused productive resources have been substantially re-employed. In these circumstances, it is not surprising that the economy’s growth rate in recent years has tended to be a little lower than was typical earlier in the expansion. Even so, employment has been increasing at a rate well above trend over the past year and the unemployment rate has reached 30-year lows. The strong demand for labour has also been evident from liaison reports and other indicators such as the high level of job vacancies and the high proportion of firms in surveys reporting difficulty obtaining suitable labour.

"On its face, this combination suggests that there may have been some underlying slowdown in productivity, either of a cyclical or structural nature, though its extent is difficult to explain. What does seem clear, however, from several sources of information, is that the economy is operating with very limited spare capacity. In addition to the evidence of strong labour market conditions and shortages of suitable labour, business surveys and liaison reports continue to indicate that capacity utilisation in the non-farm economy is at cyclically high levels.

"The combination of strong global conditions, rising commodity prices and tight capacity domestically has contributed to a pick-up in inflationary pressures since the start of the year. Producer price indices showed further strong increases in prices at all stages of production in the September quarter, with pressures evident across most industries. Measures of aggregate wages, though not accelerating further, have continued to grow at a pace that is higher than the average of recent years. Reports of significant increases in non-wage labour costs have continued over recent months".

And, in conclusion:  "Recent information suggests little reason to change the Bank’s earlier assessment that in the near term, underlying inflation will continue to run at about 3 per cent. Longer term, prospects for some moderation in underlying inflation have been improved by the policy actions taken this year. The Board will continue, over the months ahead, to assess whether these actions will prove sufficient to achieve the objective of 2–3 per cent inflation over time".

Henry, 10/11.  John Howard has been in discussions this week to contract a Free Trade Agreement with Japan, our biggest trading partner. It is a sensitive time also in our efforts to do a similar deal with China. 

Although the FTA is still far from being finalised, after two years of discussions, the two countries are close to agreeing to start formal negotiations.  If the FTA is successful, it is likely to bring an extra $38 billion into the Australian economy.

Henry, 9/11.  The ABS unemployment figures released this morning highlight the ongoing strength of the Aussie economy despite this year’s interest rate hikes.  While many analysts were expecting a significant weakening in employment growth, and indeed the seasonally adjusted figures indicate such a weakening, the official unemployment rate remained at a 30-year low in October. 

The seasonally adjusted unemployment rate actually fell to 4.6% mainly due to a plummeting seasonally adjusted participation rate, but trend estimates indicate a solid participation rate and a static unemployment rate.  The ABS seasonal adjusters clearly expected much higher participation rate growth – could it be because there is little seasonal work available in the drought-ravaged country?

The graphic below, from Bloomberg dated November 6, 2006, shows just how wrong each analyst was.

According to the ABS seasonally adjusted figures, the change in employment was -32,000, the jobless rate plummeted to 4.6% and the participation rate fell to 64.7%.  The trend estimates were: employment is steady, unemployment rate is steady and the participation rate was relatively steady at 65%.

Clearly the ABS have to release some sort of statement explaining their process of seasonal adjusting unemployment figures.

Henry, 9/11.  Kevin Andrusiak and Richard Gluyas, writing today in the business section of the Oz, either know something the rest of us don’t, or are abnormally confident that there won’t be another rate hike.

According to Andrusiak and Gluyas, “EXPECTATIONS for another rate rise early next year retreated yesterday after the Reserve Bank of Australia raised the cash rate to its highest point in six years to quell inflation and slow credit growth.

“According to analysts, traders were only betting a 25 per cent chance there would be another rate rise in February, the first time the board meets after the new year and the month most likely to come under scrutiny once the impact of the November hike is washed through the credit market. They had previously been forecasting a 46 per cent chance of a rate hike before the end of March.”

However keep in mind that before the third-quarter inflation figures were released, many high profile analysts pegged the chances of another rate hike in 2006 at around 25%. They were obviously wrong.

Henry would be extremely surprised to see the core measures of inflation begin to recede after this year’s three rate hikes – perhaps a 50 basis point hike in November may have been enough but, by only hiking by 25 basis points, the RBA have made sure the interest rate issue will be with us well into 2007. Be sure to read Henry’s latest advice to the RBA here.

Henry, 8/11.  Analysing economic data is at times a difficult undertaking. Today’s decision by the RBA to hike interest rates by 25 basis points to 6.25% seems sensible and, to Henry at least, a little dove-ish (he called for a pre-emptive 50 basis point hike).

Today’s economic data however shows the opposite – the ABS released its housing finance statistics which show a significant drop in dwelling finance commitments.

According to the ABS, total value of dwelling finance commitments excluding alterations and additions decreased 3.3% in September. Investment housing commitments fell 5.5%, while owner occupied housing commitments fell 2.3%.

The number of commitments for owner occupied housing finance fell by 1.2%, while the number excluding refinancing fell by 2.2%.

While this information would not have stayed the RBA’s hand (rightly so), it does indicate that the first two interest rates hikes are at least having some impact.  It will be interesting to see if future housing market statistics are as bearish or if this month is a one-off.

Henry, 6/11.  Job vacancies in major newspapers and on the Internet grew sharply in October, highlighting the ongoing strength of the Australian economy and the tightness of the Australian labour market.

According to the ANZ, job ads climbed 5.8% from September to an average 195,260 a week, seasonally adjusted – 25.3% higher than at the same time in 2005.

The number of jobs advertised in newspapers in October gained 1.8 percent, and was 2.9 percent lower than a year earlier, today's report said. Vacancies on the Internet surged 6.3 percent from September and 29.6 percent from a year earlier.

This strengthening labour market pushes more pressure on the RBA to hike rates as the Australian economy verges on overheating – the Australian economy has added more than 200,000 jobs since May, and with surging job ads, this trend is likely to continue.  This is, of course, good news for jobs hunters, but it is likely to push up labour costs and add to inflationary pressure.

Henry, 6/11.  According to the TD Securities-Melbourne Institute's October inflation gauge, consumer prices were relatively steady during October as falling petrol prices offset rises in the cost of fruit and vegetables.

The flat result for October was similar to that of September – indicating that annual growth in prices was 3.2% in the year to October, still above the 2-3% comfort range.  On its own, petrol subtracted 0.2% from the monthly change in the TD-MI inflation gauge.

These figures reflect the volatile headline inflation; core or underlying inflation remains a major worry, according to TD Securities chief strategist Stephen Koukoulas:

“Inflation pressures outside the effects of petrol still appear to be sufficiently troublesome to see the RBA increasing interest rates following its meeting tomorrow… Of course, the RBA and markets will be more focussed on core inflation readings which are likely to remain near the top end of the RBA target range in the near term”

As Melbourne Uni guru, Don Harding, said: "As suggested in previous months, such data is consistent with the view that monetary policy is too loose."

Hear, hear.

Henry, 3/11.  According to the Australian Industry Group-Commonwealth Bank performance of services index (PSI), the Australian services sector expanded during October.  Seasonally adjusted, the PSI rose 4.3 points to a reading of 52.0 in the month (readings of above 50 signal the sector is expanding, and readings below 50 mean…well you get it).

This month’s significant rise signals a rapid recovery for the sector after what appeared to be an interest rate inspired slump in September – highlighting the ongoing strength of the Australian economy.

Henry, 2/11.  Balance of trade data released today by the ABS finds that Australia’s trade deficit once again increased as exports fell while imports were flat.  Exports were down 1% in seasonally adjusted terms, making the balance on goods and services $646 million in the red. 

Economists were expecting a deficit of only $300 million so, while not being dramatically wrong, they were still wrong.  While many have rushed to blame the drought, in fact non-rural exports were down by 2% in the month, while rural exports fell by only 1% and services exports were up by 1%.

Henry, 2/11.  The case for a rate hike got a touch more sturdy this week as the RBA’s credit aggregates showed strong growth in credit across the economy.  According to the RBA, total credit provided to the private sector by financial intermediaries rose by 1% over September 2006, following a rise of 0.9% over August.  For the year to September, total credit rose by 14.4%.

Housing credit growth of 1% in September was slightly lower than the 1.1% average of the past year, with annual growth of 14.2% notably slower than the 17.2% average of the past five years.

Business credit rose 1% in the month following a 0.7% increase in August, while annual growth stood at 15.9%.  Meanwhile, personal credit grew 1.1% in September after gaining 0.6% the previous month, while annual growth climbed to 9.5%.

In other statistical news, retail trade data released today by the ABS showed that retail trade at current prices rose by only 0.1% in September to $18.178 billion, from a downwardly revised $18.154 billion in August.  The is slightly bearish, as economists were actually expecting an increase of 0.5% - some are saying this is evidence of the impact of this year's two rate hikes.

Henry, 1/11.  Building approval data released today by the Australian Bureau of Statistics (ABS) shows that, despite the two rate hikes this year, the housing sector remains robust.  According to the ABS figures, building approvals increased by a seasonally adjusted 6.1% in September to 13,286, and up 9% over the year.

The boom in building approvals came mainly from the unit and apartment market, which rose 11.2% - although it did fall by 36.8% in August.

This is more evidence that will pressure the RBA to up rates next week.  Henry, like 30% of his readers, is actually calling for a pre-emptive 50 basis point hike.  If you haven’t voted in the survey on what the RBA should do at their November 7 meeting, go to the bottom right hand corner of the homepage and add your opinion.

The Sheet, 31/10.  Dun & Bradstreet says insolvency risk growing

The number of Australian companies at risk of financial distress or insolvency is on the rise, according to a report issued by Dun & Bradstreet yesterday.

D&B reported that the number of companies rated moderate or very high risk of insolvency was at its highest level in 18 months, with 37.8 per cent of companies in one of those categories.

According to D&B, high interest rates and inflationary pressure are having an impact. The group’s director of marketing, Chris Gray, said: “We see companies having to deal with higher costs. The ones that are able to pass on those costs are facing slower sales. The ones that can’t are having their margins squeezed.”

The findings of the report are based on risk scoring of 350,000 companies in the D&B database. Scores are based on criteria such as whether the number of days taken to make trade payments has increased, whether a director of the company has been involved with a failed business previously, and whether the company has faced court action over payments.

“Trade payment days have gone from an average of 48 days in 2004 to 55.5 days now,” Gray said. “They got to 63 days in 2000 – a year when we were close to recession.”

D&B’s findings are at odds with the very benign view of the credit quality of business borrowers presented by ANZ in its annual results presentation last week. The bank reported that its provisions on its business loan book were as low as they had ever been. Corporate and institutional loan defaults had declined markedly.

“ANZ is only looking at its own book,” Gray said. “Ours is a much wider survey. And ANZ is reviewing past performance. We use our scoring to get a picture of what is likely to happen in 12 months.”

National Australia Bank’s September quarter business survey also suggests a gloomy outlook. It found that, while current conditions were sound, business confidence had fallen and investment intentions were weakening. If mining companies were excluded, business investment had come to a standstill

The factors behind the fall in confidence were higher interest rates and higher costs, weaker forward orders and a shortage of skilled workers.

NAB chief economist Alan Oster said: “Recent increases in interest rates have significantly eroded confidence.”

One curious finding from the D&B survey was that Western Australia and Queensland, the boom states, were areas where businesses were more at risk. “In both those states there is a lot of wage pressure,” Gray said.

“The mining boom is really quite concentrated if you think about the number of companies that are profiting from it. Right now in those states you have a lot of small explorers, whose ventures are high risk.

“The other factor affecting Queensland is its relatively high involvement in agriculture.”

The industries most at risk were mining and agriculture. Those least at risk were services and retail and wholesale trade. Small companies were more at risk than big ones.

Click here to visit The Sheet website.

Henry, 30/10.  The interest rate spin contest is about to heat up, with Bomber Beazley signaling that the Opposition is about the launch a campaign attacking the Howard Government’s recent record on cash rates.

In conjunction with the release of their plan to attack the skills crisis, the Labor Party are about to launch an advertising campaign highlighting Howard’s purported broken promises.

"We are going to have billboards out there, we are going to be pointing out to the Australian people how John Howard has breached his promises, and it will give us an opportunity to talk about our future plans as the future party," Mr Beazley said.

Our beloved leader hit back with this old chestnut:

"I have got a billboard for you," Mr Howard said. "Beazley and Keating 17 per cent; Howard and Costello 7.75 per cent. What about that, hey?"

The Government’s attacks on Labor interest rate history were considered to be the central reason for their 2004 electoral success – it will be interesting to see who wins the next battle of the spin.

Henry, 30/10.   House auctions go well despite near universal expectation of another rate rise next week.

That just about sums up the current state of Australia's economy, and helps to explain why the PM has conceded the case for said rate rise.

The recent Fair Pay Commission decision was helpful for the government, as Cornwall implies below.  (How do these cartoonists so often get it right?)  It was even economically helpful at the time of skill shortages and the obvious need to encourage people into jobs.  The real test will come in the next downturn - will Dr Harper have the bottle to provide a low increase or even no increase?  If he does not, the whole innovation will be an expensive failure.

Henry, 27/10.  ABARE have today put a price on the drought: 0.7% of our GDP or $6.2 billion.  The latest downgrade is expected crop production, the third since March, comes as Prime Minster John Howard tours some of the country’s most drought ravaged areas.

Farm production as a whole is predicted to fall 35% from last year, with the national wheat crop expected to be a little over 9.5 million tonnes – a massive 61% below last year.  The wheat crop, when combines with the barely and canola crop, is predicted to be only 13.55 million tonnes – the smallest since the drought of 1994/95.

The ABARE report comes as news spreads that many Australian farmers will be importing expensive grain for overseas to supplement their poor feed. It is indeed a dire situation.

Click here to visit the ABARE report.

Henry, 26/10.  In a move that has surprised just about everyone, the first ruling by the new Australian Fair Pay Commission (AFPC) has got the approval of the ACTU and Prime Minister John Howard.

The fundamentals of the decision are: one million of Australia’s lowest paid workers will receive the full increase of $27.36 a week, bringing the federal minimum wage to $511.86 a week. A further 220,000 people have been awarded an increase of $22.04 cents a week to all minimum wage pay scales of $700 a week and above.

Henry agrees with everyone: this is a great thing for Australia. While it is well known that the shortage of skilled labour have been driving up wages for middle-range earners, a responsible Government makes sure that the lowest paid do not see their wages disappear to 4% inflation.

Click here to visit the AFPC website.

Henry, 25/10.  Inflation figures for the September quarter were released at 11.30am today, and they show that the “headline" number for Consumer Price inflation is running at 3.9 % - slightly lower than the 4% in the June quarter, but still far too high.

The following is an overview of CPI movements - stolen directly from the ABS site:

--   Contributing most to the increase this quarter were fruit (+20.5%), property rates and charges (+5.6%), rents (+1.0%), water and sewerage (+4.7%), other household supplies (+2.9%), electricity (+2.1%), motor vehicles (+0.8%), insurance services (+2.2%), tobacco (+1.4%) and domestic holiday travel and accommodation (+1.2%).

--   The increase in fruit contributed 0.3 percentage points to the September quarter CPI increase.

--   The most significant offsetting price falls were vegetables (-5.3%), pharmaceuticals (-5.0%), automotive fuel (-1.1%) and tertiary education (-2.2%).

Henry, 24/10.  The Australian economy has been getting a lot of kudos recently.  Yesterday, Access Economics (see below) claimed that GDP growth is likely to jump to over 4% in 2007.  Today, it is the IMF.

In its annual review of the Australian economy, the IMF forecasts that growth would rise from 2.75% in 2005 to 3.1% this year and 3.5% in 2007. Inflation should also ease from a rate of 3.5% this year to 2.9% in 2007.

The IMF, like Access, highlights the capacity constraints apparent in the Australian economy, and says that interest rate hikes are the correct method of balancing the threats from inflation.  And they say that more hikes may be needed:

”Further monetary tightening may eventually be needed if domestic demand growth, or other factors lead to an increase in underlying inflation pressure," it says.

The IMF, however, is clearly not in the practice of being purely laudatory.  Considering Australia’s $15.8 billion budget surplus – the IMF estimates that only about $5 billion of the budget surplus can be directly attributed to higher than normal commodity prices.

So while this year’s tax cuts were affordable, they were also stimulating, and therefore exacerbated the problems associated with capacity constraints.  The Australian Government, according to the IMF, should therefore just let the surplus grow.

"If, in coming years, Australia faced a global slow-down, reducing growth and resulting in a large fall in commodity prices, staff noted that the strong fiscal position would allow a temporary move into deficit if needed".

Click here to visit the IMF website.

Henry, 24/10.  Economic forecaster Access Economics released a report yesterday that predicted Australia’s GDP will jump by more than 4% in 2007.  However, the forecaster said that the Australian economy is likely to suffer due to capacity constraints:

"Australia - in a sense - is showing all the classic signs of an economy struggling against capacity constraints - too much demand too little supply," he said.

"But even if the Reserve Bank is raising rates now, I think the longer-term outlook for the growth rate of the Australian economy is pretty good."

"I think that inflation concerns will fall away again, because more workers are willing to work, because companies have invested so much in new plants and equipment and the factories and office blocks and the rest of it, that increased capacity will take some pressure off prices here in Australia."

The crucial driver behind the growth in continued investment:

"The key driver is that the great profits of recent times have encouraged companies to put their money where their mouth is," he said.

"They are investing in the new plant equipment factories, computers, roads, mines, ports and the rest of it, that gives the capacity, the productive capacity for the Australian economy to pick up pace."

"Western Australia and, to a lesser extent, Queensland and the Northern Territory have seen an enormous leap in investment spending," he said.

Click here to visit the Access Economic website.

Henry, 23/10.  PPI Shocker - up 1% for third quarter, and 4% for year to September.

It’s an important week for the macro-economy, with the release today of the ABS September quarter producer price index (PPI) and the ABS September quarter consumer price index (CPI) on Wednesday.  Today’s PPI data shows that final stage PPI rose by 1.0% for the September-quarter, up 4.0% through the year.

This rate, although down considerably from the 1.6% in the second quarter (4.5% year to June), is still uncomfortably high and is more likely to encourage another rate hike before the year is out.

The PPI gives analysts a hint of what to expect in Wednesday’s CPI figures.  The shockingly high June quarter PPI data was followed with CPI data showing an increase of 4%, although core inflation measures generally put inflation around 2.8%. 

It is therefore expected that today’s slightly lower PPI data may mean Wednesday’s CPI data will not be as scary as 4%.  However, it is crucial to realise that headline CPI rates don’t generally factor in the RBA Board’s interest rate decision making – it is the core rate that is deemed more accurate.

While the PPI is down slightly, it is largely due to the significant fall in the price of fuel.  Indeed, a barrel of oil has now dropped to around $US57 compared to over $US78 during late-July.

The core CPI figures, either the RBA’s ‘Trimmed Mean’ or ‘Weighted Median’, exclude the more volatile items in the CPI basket of goods, like food and fuel.  While the PPI has fallen, it is more than likely due to the fall is these volatile items rather than across the board.

For more, read today's blog.

Henry, 19/10.  Australia’s movement towards a sustainable hydrogen economy was boosted today with the launch of a new $10.6 million research cluster at the CSIRO’s Energy Centre in Newcastle.

The new research is part of the $97 million Flagship Collaboration Fund, designed to enhance collaboration between Australia’s research community.  This specific project is aimed at enhancing collaboration between the CSIRO, Australian universities and other publicly funded research agencies.

The research cluster aims to gather Australia’s experts in hydrogen generation, solid-state storage and utilisation (fuel cell) technology.  The aim is to develop new materials that improve the efficiency and economics of hydrogen generation, storage and use.

Do not miss what is perhaps the most rigerous evaluation of government spending on R&D, that done through the (bipartisan) Cooperative Research Centre (CRC) program.  The evaluation was by Insight Economics.  It concludes: "... the clear overarching finding from this study is that the CRC Programme is delivering strong net positive economic benefits for Australia".

Henry, 18/10.  The latest reading of the Westpac-Melbourne Institute's leading index of economic activity indicates the economic growth is likely to moderate slightly over the next three to nine months.

The August reading showed an increase of 0.7 index points to an annualised rate of growth of 6.1%, compared to 6.5% in July.  However, these results indicate the present strength of the Australian economy, as the index’s long term average sits at only 4.1%.

Westpac chief economist Bill Evans said:  "This growth is consistent with the recent strength of the labour market".

"The Reserve Bank has also alluded to surprising strength in tax receipts, which is also pointing to a stronger economy than depicted by the official national accounts that measured the pace of growth over the year to June 2006 as an insipid 2 per cent."

The changes in the individual monthly components were as follows: Share prices grew by 2.6% while real money supply gained by 0.9%, while dwelling approvals fell by 12.6% drop in dwelling approvals and US industrial production fell by 0.1%.

Three out of the four quarterly components also increased: Overtime worked, core manufacturing material prices, and real corporate gross operating surpluses increased, while the productivity measure declined.

Henry, 18/10.  According to a new report released today by Access Economics, obesity cost Australians $21 billion last year – more than twice the national cost of Medicare.

The report measures the impact of obesity on both the loss of productivity and quality of life.  Henry covered the economic costs of obesity in a blog in late September, but frankly he is flabber(ahem!)gasted at the figure Access Economics came to.

The largest cost involved with obesity, according to the report, is the burden of disease.  The report highlights sharply increasing incidence of diseases closely related to obesity, including type 2 diabetes, heart disease, stroke, osteoarthritis and cancer.  Apparently the financial burden of disease is around $17.2 billion a year, mainly arising from the costs of disability, loss of wellbeing and premature death.

The loss of productivity caused by obesity cost Australia $1.7 billion last year, arising from the loss of employment and premature death.  Australians spend $873 million on health spending related to obesity and another $804 million in carer costs.

Currently, obesity impacts upon 3.24 million Australians, but the prognosis is far from positive – by 2025 there could be 7.2 million obese Australians.

Henry’s reactionary side wants to highlight the benefits of obesity – “Jeez those steaks taste good!” – but he’s not that foolish.

Visit the Access Economics website here.

Henry, 17/10.  Cossie’s view that Australian women should have three kids – “one for mum, one for dad and one for the country” – must be getting through: women are having more kids.

Of course, it could be the $4000 baby bonus, but the latest Australian Bureau of Statistics figures on birth rates show that the national fertility rate stands at its highest level since 1995.

The fertility rate stands at 1.81 babies per woman (259,800 in total) in 2005, up from 1.77 (254,300) in 2004.  The accepted replacement fertility rate is around 2.1 births per woman.

The average age of mothers now stands at 30.7, whereas it is 32.9 for fathers.  This reflects a dramatic change in the past 20 years – in 1985 the average age for mothers was 27.3.

Another interesting change over the past 20 years is that in 2005 only 68% of births were to parents who were officially married, compared to 85% in 1985.

Henry also extends his congratulations to Tasmanian and Indigenous women, who trump everyone with birth rates of 2.1.

Henry, 16/10.  A great institution within the Australian economy has just fallen to the logic of Henry.  As recently as last week, the National Australia Bank considered the chance of another rate hike in 2006 to be only 25%.  Effectively, they believed that if the RBA hiked again during 2006, then they were being overly aggressive and would therefore be required to cut rates in 2007.

Today, however, they have carried out an efficient double-pike backflip – they now place the chance of another rate hike in 2006 at 70%.  In fact, the NAB says that only a surprisingly low September quarter CPI figure will prevent a rate hike in November – a highly unlikely proposition.

The NAB believe that one more hike enough to bring inflation under control, and that the next rate hike will be the last in the cycle.  They believe that the domestic economy is in the process of slowing “with confidence, forward orders and credit all slowing and that capacity utilisation has peaked and will fall from here.”

Henry obviously disagrees and looks forward to the next NAB backflip in early 2007.

Henry, 16/10.  As farming analysts suggest that this year’s drought is likely to cause a record-low wheat crop (beating the record low of 9.6 million tons in 2002/03 – it was 25.1 million tons last year), the price of wheat is soaring.

The price of wheat has increase by 47% in the past year on the Chicago Board of Trade to a ten year high.  Of course, farmers would be celebrating such an event if they had a crop to sell…ahhh, the intricacies of the market.

Sadly, this price rise will add upward pressure to the Consumer Price Index, and more than likely add more pressure to interest rates.

It is likely therefore that the State Premiers plea to hold interest rates until it rains is not likely to eventuate – indeed, the drought is likely to add to interest rates.

Henry, 13/10.  According to a new Bloomberg News survey, 17 out of 24 economists surveyed believe that the RBA will hike on November 8.  The factors that may have influenced these deep thinkers were the RBA Governor Glenn Stevens’ speech and the stunningly strong employment figures (see below).  How about inflation being too high, fellas? For those who need some help, here's a brilliant piece of economic forensic analysis.

The predictions of said economists are as follows:

Henry, 12/10.  Stop Press:

Yet another month of stronger than expected employment growth, with the Australian economy adding 31,400 extra jobs in September, much higher than the 5,000-10,000 the analysts had been expecting.  She’s still a strong economy, gentle readers!

Currently, the ABS trend estimate of unemployment shows a rate of 4.8%, which is the same as the seasonally adjusted figure.  There was also an increase in the participation rate, so it’s good news all round.

This also contradicts to a certain extent the slowdown analysts have been expecting.  The June employment growth was 52,000, July – 50,700, August – 23,400 and now 31,400 for September.  That’s right, folks, 157,500 extra jobs since June!

This result goes against the recent Roy Morgan Unemployment Estimate, which showed an increase in the unemployment rate of 0.7% from 6.6% to 7.3% - with the bulk of the increase being felt in the drought ravaged rural and regional areas.  Of course, Henry has pointed out (see Labour Market - strong demand, rising productivity, dud figures) that the official ABS unemployment figures underestimate the real level of unemployment by some 10%.

Of course, this is evidence that the two rate hikes in 2006 have had little impact on labour demand - so Henry repeats his call for at least two more rate hikes.

Henry, 12/10.  Peter Costello confirmed yesterday what Australian farmers have known for the past 2-3 months: 2006/07 is looking to be the worst drought since records began.  Cossie also indicated that he has made several changes so that farmers are more able to claim drought relief.

According to the Age, for the six months to September, the Bureau of Meteorology's maps show most of Victoria in a red zone of rainfall "very much below average", which is likely to be similar to other states.

Henry has already highlighted the impact the drought is having on the economy of rural and regional areas – the Roy Morgan Unemployment Estimate showed sharply higher unemployment in these areas.

Of course, one factor exacerbating the drought has been several years of below average rainfall.

"The material that's coming back to me is that this could be the worst drought we've ever suffered," Mr Costello said. "It looks like we are gearing up for a very hot summer.

"In eastern Australia, and in a good part of western Australia, there is going to be no crop. I am told that it's already too late in eastern Australia. Even if the rain came tomorrow, it's too late for a crop."

Costello also said that he believed the peak of the commodity boom is now over, as indicated by falling oil prices, but that it wouldn’t have an effect on the budget as commodity price falls had been factored in.

Henry, 12/10.  The Federal Department of Treasury gave their surest sign yet that the Chinese led commodities boom is unlikely to yield anytime soon. In an address to Australian Business Economists in Sydney yesterday, Treasury chief economist David Gruen said that although he expects that the slowing US economy will not harm the Chinese boom, he has been surprised that the extra demand for Australian minerals has not resulted into increased export volumes.

Although many have been disappointed by the flat export volumes, Gruen highlighted the similarities between the last mineral price boom, beginning in the mid to late 1970s, to the present, which showed a similar story.

As reported in the SMH, Gruen said: "Five years into the current mining boom, export volume growth has been sluggish but the same was true five years into the previous boom,"

"Strong export growth did eventually occur in the previous mining boom but in the second half of the decade following the start of the boom rather than in the first half of that decade."

Consequently, Gruen said he expected mineral export volumes to increase markedly in the next five years.  Although this projection seems overly optimistic given the results of the last five years, it is not surprising given the Chinese economy is showing no signs of abating.

The Chinese Academy of Social Sciences last night forecasted economic growth over the next two years to continue at the positively nuclear powered 10%+.  If this is true, Henry expects the good times to just keep on rolling.

Henry, 10/10.  According to the latest NAB Monthly Business Survey, business confidence and forward orders remained unchanged for September, while business conditions improved slightly but were flat in trend terms.

The main message in the NAB Monthly Business Survey is that confidence has trended downward in the face of the RBA’s rate hikes. By sector, confidence remains highest in communications, recreational & personal services and construction. Confidence in the short term was weakest in wholesaling, manufacturing and finance, business & property services.

Despite falling significantly in September, capacity utilisation remains relatively high.  Capacity utilisation fell 1.3% to 81.8% in September – the lowest rating since April 2005.

Wages rose strongly in September, up 1.2% on a seasonally adjusted quarterly basis – about the same as reported for July and August. These increases were not enough to lift the annual rate of wage inflation from around 4.7% for the fourth consecutive month.

These results did not alter NAB’s forecasts however; they believe the RBA will remain on hold, leaving only a 25% chance of another hike in 2006.

Henry, 10/10.  A new survey released today showed exactly what Henry had thought about the two interest rate hikes of 2006 – they did not cause overwhelming concern among Australians.

Backed by strong income rises and low unemployment, it seems as though the two 25 basis point cash rate hikes had little impact on Australians.

The ING Direct-Melbourne Institute Household Saving & Investment Report showed that 59% of the 1200 households surveyed said they were not overly concerned or not at all worried about the last interest rate hike.

The report also showed that 29% of people said they would spend their budget tax cuts, with only 16% saying they would save the tax cuts and 15% saying they would use them to pay off debt.

"While Australians don't believe that the August interest rate hike will affect their lifestyle or weekly budget, it is reassuring to see that more than one in three Australian households are choosing to spend the treasurer's pay packet increase wisely," Ms Claes said to the Oz.

Of course, the aim of hiking rates is to have a palpable impact upon aggregate demand.  The fact that the 2006 rate hikes did not cause concern merely raises the prospects for further hikes ahead.

Henry’s latest advice for the RBA (for full article, click here) is as follows:

"Goods and services inflation is too high for comfort.  This is the single economic statistic the Reserve will worry most about.  This is why Henry believes at least two further rate hikes will be needed, although recent global developments may provide some breathing space".

Henry, 9/10.  According to the ANZ measure of job advertisements, the number of jobs advertised across the country increased slightly in September, and the labour market is expected to remain tight in the coming months.

After a fall of 1.3% in August, the total number of jobs advertised in major metropolitan newspapers and on the internet rose 0.3 per cent in September to an average of 184,563 per week.

However, this data is not evidence of the loosening up of the labour market, according to ANZ head of Australian economics Tony Pearson:

"Rather, it suggests that labour market conditions will remain tight, but will not tighten further in the near future," he said.

Henry, 9/10.  According to the latest quarterly survey of small to medium enterprises (SMEs) by the National Australia Bank, business conditions among SMEs remained strong during the September quarter.

The NAB SME Business Conditions Index jumped 6 points to 20 index points – substantially higher than the 14 index points recorded by their larger business counterparts.

“All sectors, other than property services, accommodation, cafes and restaurants reported improved conditions in the quarter,” said, George Frazis, executive general manager of Business and Private Banking at NAB.

“Conditions were strongest among SMEs with turnover between $5 – 10 million a year,” he said today.

SME Profitability also remained strong, with the NAB SME Current Profit Index moving up 12 points to 10 index points, while the longer-term 12 Month Profitability Index falling 5 points to 32 index points.

Henry, 9/10.  According to a Bloomberg survey, 12 of the 23 economists surveyed (‘they didn’t call me – I would have made it 13’, said Henry) believe that the Reserve Bank will hike at the November 7 meeting following the Government’s third quarter inflation report to be released on October 25.

Australia’s economy grew at 0.3% in the three months ending June 30 (1.9% year on year), and headline inflation was measured to be 1.6% quarter on quarter and 4.0% year-on-year while core inflation for the year to June was 2.9%.  Henry would expect the headline inflation rate to fall slightly in line with falls in petrol and food costs, but core inflation is likely to continue to be elevated.

Henry, 8/10.  The Olivier Internet Job Index records another record, but growth continues to ease.

Accounting and legal jobs are languishing while building jobs have fallen after housing approvals dropped in August.

Henry, 6/10.  Australian consumer confidence was up for the second consecutive month, indicating that the easing petrol prices may have made up for the Reserve Bank’s rate hikes.  The Roy Morgan Consumer Confidence Rating, released today and taken at the end of September and beginning of October, showed a rise of 7.2 points to 115.8. 

Consumer confidence has regained almost the entire loss that occurred in August when consumers were suffering from elevated fuel prices and the August 2 rate hike.  The October rating is a significant 12.1 points higher than the August rating of 103.7.

The average price of petrol in Melbourne and Sydney has recently fallen to around $1.12 a litre, compared to the August Australian average of $1.37 – a saving of 25 cents a litre.

The Roy Morgan Consumer Confidence Rating is based on Australians’ ratings of the national economy, the buying climate and their personal finances.   The rating has ranged from a high of 124.5 in February to a low of 103.7 in August this year.

Henry, 5/10.  Business confidence and expectations are continuing to weaken, according to the National Australia Bank Quarterly Business Survey for the September quarter.

Some of the key findings of the survey were:

- Business confidence was down significantly from the June quarter – falling 6 points to +2.

- The fall is most dramatic in New South Wales and Victoria, whereas Queensland and Western Australia are largely unchanged.

- Business investment intentions are also down.

- However, actual business conditions are unchanged from the June quarter, and are still at elevated levels.  Essentially, sales are still at high levels and profits have remained high (although suffering slightly from higher producer prices).

- So, despite weakening confidence and expectations, the economy is still operating at high levels of capacity utilisation, as evidenced by low unemployment.

NAB maintain that global growth has peaked, and although core CPI is likely to remain at elevated levels through the first half of 2007, it is likely that it will move back into the acceptable range by around mid 2007.

The NAB believes therefore that the RBA will remain on hold (they rate chances of another hike to be 25%), and if the RBA is too hawkish and hikes again, we should expect rate cuts in 2007.

Henry, of course, disagrees, saying "Goods and services inflation is too high for comfort.  This is the single economic statistic the Reserve will worry most about.  This is why Henry believes at least two further rate hikes will be needed, although recent global developments may provide some breathing space".

Henry, 3/10.  Figures released by the Australian Bureau of Statistics today show that the value of retail trade rose 0.3 per cent in August to a seasonally adjusted $18.177 billion from a downwardly revised $18.131 billion in July. While not spectacular, retail sales have risen in 10 of the past 11 months.

But there are signs that consumers are tightening the purse strings in the wake of the May and August interest rate rises. That, and heavy discounting, cut department store turnover by 7.2 per cent, following an increase of 7.7 per cent in July.

Retail trade however edged upward in August, rising 0.3% to a seasonally adjusted $18.177 billion from a downwardly revised $18.131 billion in July.  Department store turnover fell sharply, down 7.2%, almost completely wiping out the 7.7% increase in July.

Henry would expect retail trade to continue moving up in September given the recent fall in petrol prices.

Henry, 2/10.  It’s the first day of the fourth quarter and already third quarter economic growth forecasts are rolling in.  AAP’s economic indicator for October shows that real GDP growth for the September quarter is likely to have increased by 0.9% for an annual rate of 2.5% - significantly higher than the second quarter rise of 0.3% (1.9% annual) as calculated by the ABS.

The higher predicted third quarter growth was largely due to a rebound in inventories and a jump in net exports.  Business inventories made a negative contribution to GDP growth of 0.7% in the second quarter, while net exports subtracted 0.2%.  Both are expected to improve somewhat.

The July tax cuts are expected to boost household spending as well, which will add to GDP.

However, an area of concern will be the impact of ongoing dry weather on the farming sector – last week ABARE downgraded in farm production outlook (as Henry covered in last Friday’s blog) and the Bureau of Meteorology are expecting the dry weather to continue.