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The global economy continues its recovery path, mostly due to Asia, but the extent of recovery differs across regions. Developed countries are still weighed down by widespread spare capacity and high unemployment rates, and predictions of return of output to pre-crisis stage could be as far as 2013. Japan’s production will suffer in the near term, though effect on the rest of Asia is not expected to be very high.
Prices of commodities, including oil, have risen, pushing up actions against consumer price inflation in many countries. Central Banks of many countries have tightened monetary policies. Overall, though, global economic conditions remain fair.
Australia's terms of trade have peaked to the early 1950s levels(See graph below) and national income (NI) is growth is robust. Private investment is increasing in response to high commodity prices. However, in the household sector, there continues to be caution in borrowing, thus, rate of saving has shot up. The rains and floods in the summer have reduced output, and especially coal production is suffering. Recovery is expected, though soon.
Asset prices are still stagnant, and credit growth slow.
Private Consumption:
Gross Domestic Product grew by 2.7 %, mainly on account of growth in demand for Australian commodities. Investment in business is looking up. Employment growth continues to be strong. The natural disasters will have a significant effect on output in the next 3 quarters, mostly on coal production.
Employment:
Employment growth has moderated in recent months and unemployment rate is steady at 5 percent. Leading indicators point to further employment growth, though at a slower rate. Wages are back to the pre-crisis levels. The graph below shows the recovery path.
Inflation:
Given that Australian dollar is at record highs, and the labour market conditions, inflation has declined noticeably from its 2008 levels, although commodity prices are high. Headline inflation is high primarily driven by decline in agricultural production, attributable to the heavy rains. However, agricultural goods prices will moderate towards year-end, and inflation will climb down to the acceptable levels of 2–3 per cent. This is within the inflation rate that RBA and the Australian Government target. To quote from the latest Statement on the Conduct of Monetary Policy issued in September 2010: In pursuing the goal of medium-term price stability, both the Reserve Bank and the Government agree on the objective of keeping consumer price inflation between 2 and 3 per cent, on average, over the cycle. This formulation allows for the natural short-run variation in inflation over the cycle while preserving a clearly identifiable performance benchmark over time.
The fall was due to decline in domestic demand coupled with capacity pressures in 2008-09, followed by wage growth decline. The fall in inflation rates has been sustained due to the rising exchange rate and refusal of consumer spending to pick up.
Inflation is expected to be inch up to 3 percent leels by 2013, driven mainly by higher rent and other housing costs. Headline CPI inflation was 2.7 per cent over the year to the December quarter.
Other factors:
Private demand has very slowly started to pick up, and as fiscal stimuli near their completion, public demand is on the decline. However, government expenditure will increase on account of the relief work in the flood affected areas.
Revenues from exports have seen a considerable increase due to increase in commodity prices, because of which the terms of trade are at historical favorable. This increase is likely to continue in near future due to supply constraints on account of weather-related issues and a strong demand causing increase in Australian export prices.
Exchange rate is now 37 percent above its post-float average.