The Lucky Country's booming economy

13 Apr 2022 2 month(s) ago

Australia's economic health is starkly at odds with much of the rest of the developed world. Should the authorities make hay while the sun shines or prepare for inflation?

Australia’s economy seems to be behaving in a very different way to much of the rest of the world. The indicators are mostly very positive, and although there are growing fears of inflation, that is not yet having an impact on interest rates.

Here are some of the signs of strength. The National Australia Bank has most business measures strong:

Capacity utilisation is high, suggesting the prospects, or forward indicators, are good, too:

Labour costs are rising, but not wages as yet:

There is still underemployment, which might partially explain the wages situation. The jobs trend is also yet to get back to pre-COVID levels:

Macrobusiness argues that, given the economic surge, the best strategy is to take advantage of the present before darker times come next year. That means keeping interest rates low for now, rather than jumping in because of rising inflation internationally:

“If we let the economy run hot instead of listening to panic inflation panic merchants, we can deliver a powerful labour market into the forthcoming global downturn, which is more likely than not going to deliver a tidal wave of deflation over 2023.

Australia could ride out the coming storm rather like it did in 2000, which is one reason why it had its twenty-year recession-free run. If the RBA panics instead, we will join the world in an epic bust like it and we did in 2008.”

This is an arguable case. But having interest rates virtually at nothing is bound to produce the kind of distortions, especially in property prices, that we have seen. In a general sense, an economy that has almost no cost of capital is an economy that is vulnerable. It has happened because of desperation in the wake of the global financial crisis of 2998, but it is only a band aid.

There are still deep, unanswered questions about what the future of the monetary system should be. The RBA won’t look at that, but it is nevertheless the underlying problem.


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