Friday, July 9, 2010
THE job figures continue to amaze. The International Monetary Fund has bumped up its estimate of global growth in 2010 mostly in our key export markets.
Commodity prices are somewhere in the stratosphere, lifting our export earnings. And one survey suggests inflation is now well above the Reserve Bank's target zone.
Could all this lead the Reserve to raise interest rates yet again in August right in the middle of an election campaign?
Until yesterday, the markets were split between those expecting the Reserve to leave rates on hold until 2012, and some punting on a rate cut ahead.
They were focused on the main event in the world economy right now: fears cash-strapped, highly indebted governments may default on their debts.
But the Reserve is focused on what it sees as the main event in the Australian economy: tens of billions of extra dollars flowing in from soaring minerals prices potentially pushing up prices here.
After yesterday's job figures, and the IMF's optimistic new forecasts for global growth, the markets turned around. Most still expect rates to stay on hold, but a minority now tip the Reserve to raise rates a seventh time in August.
An election campaign wouldn't stop it: it made that very clear when it raised rates during the 2007 campaign, embarrassing John Howard. This time it could square up by embarrassing Julia Gillard.
Treasurer Wayne Swan has told the Reserve its job is to keep underlying inflation between 2-3 per cent. It was 3 per cent in March, and Westpac's chief economist, Bill Evans, thinks that if it goes any higher in the June figures due this month, interest rates too will go higher.
Yesterday's job data didn't help, surprising even the optimists. On the volatile seasonally adjusted figures, employment grew by almost 46,000 in June, with almost 200,000 jobs added this year.
Seasonally adjusted unemployment fell to 5.1 per cent, the lowest rate since before the 2009 bushfires.
Even the steadier trend figures show jobs up by more than 300,000 in the past year. And most of them are full-time jobs. Workers who had their hours cut in the crisis are going back to normal.
But are jobs back to normal?
The Bureau of Statistics estimates that in net terms, of the 306,000 jobs created in the past year, only 56,500 went to the unemployed.
The rest went to people formerly outside the workforce migrants, temporary foreign workers, students and others who had been on the sidelines of the job market.
There are still 315,000 more of us unemployed or underemployed mostly wanting full-time jobs but stuck in part-time ones than there were before the crisis. The bureau estimates that 12 per cent of workers are unemployed or underemployed.
Only in Victoria and Queensland are full-time jobs back to their pre-crisis levels. Even Western Australia has fewer full-time jobs now than in 2008. Things are warming up, but hardly hot.
The IMF's forecasts look reassuring. Despite the debt crisis and governments tightening their belts, the IMF has lifted its estimate of global growth this year from 4.2 to 4.6 per cent. It has left its 2011 forecast unchanged at 4.3 per cent. And most of this year's extra growth is in Australia's main export markets.
For Australia, the IMF's forecasts are unchanged at 3 per cent this year and 3.5 per cent in 2011. But it now predicts growth to be 10.5 per cent this year in China (our No. 1 market), 2.4 per cent in Japan (2), 9.4 per cent in India (3), 5.7 per cent in Korea (4), 3.3 per cent in the US (5), 3 per cent in New Zealand (6), 7.7 per cent in Taiwan (7) and an amazing 9.9 per cent in Singapore (8). Wow!
But there's a serious downside. First, that growth is already behind us. The IMF says the global economy grew by 5 per cent in the first quarter of 2010, but will be slower in the second half. And it has sliced next year's growth forecasts for Europe and China alike.
Second, it sees a real risk ahead: unless European governments can persuade markets that they are a safe credit risk, global growth next year could shrink to 2.7 per cent. Europe would sink into a double-dip recession and the US would stagnate.
There is good reason for the Reserve to be wary of getting out even further in front of a world at risk of going backwards. The markets yesterday rated the odds of an August rate rise at just 20 per cent. But the inflation figures could change that.