High-rise growth hits new lows as approvals slump

MELBOURNE'S high-rise boom is off the boil.

Approvals for new high-rise units in the six months to December slumped to less than half the level of a year earlier, as building approvals continue their downward spiral.

But the Bureau of Statistics reports that in 2011 Victoria again dominated Australian home building. For the second year in a row, 35 per cent of all new homes approved in Australia were to be built in Victoria, which has just 25 per cent of the population.

In the rest of Australia, approvals for new homes are at their lowest level since the depths of the financial crisis. Bureau trend estimates show just 11,189 homes approved, down 19 per cent in a year.

The federal government's stimulus has ended with a thud. Just 139 public sector homes were approved in December, fewer than in any month since records began in 1983, and probably since World War II, when home building virtually halted.

The best news is that trend approvals for private sector houses are flattening, after a two-year fall since the Reserve Bank began raising interest rates. But at 7400 new homes a month, they are well below estimates of underlying demand.

Just 149,076 new homes were approved in 2011, down from 176,564 in 2010. Experts estimate Australia needs 220,000 new homes a year.

Victorian approvals fell from a record 62,198 to a still strong 52,056. But by the end of the year the brakes were on, especially in the most volatile sector, high-rise apartments.

Approvals for new high-rise apartments in Victoria (virtually all in Melbourne) jumped from 3766 in the second half of 2009 to a record 8623 a year later. By the second half of 2011 they were back to 4243, still a high level. Approvals for low-rise apartments and units remain close to the record highs recorded in 2010.

The industry seized on the weak national figures to call for another interest rate cut when the Reserve Bank board meets next Tuesday. Financial markets estimate an almost 80 per cent chance the board will cut rates.

The bank yesterday promoted senior insider Dr Christopher Kent to be assistant governor (economics), in effect the chief economic adviser to governor Glenn Stevens and the board.

Dr Kent, formerly the bank's research chief, will replace Dr Philip Lowe, who becomes deputy governor on Valentine's Day. Previous occupants of his job include Mr Stevens and his predecessor as governor, Ian Macfarlane.

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Car exports slump

AUSTRALIA'S car exports have crashed to their lowest level since 1998, as the high dollar and the loss of foreign export contracts has left car-makers battling to keep a toehold in the global market.
The Bureau of Statistics said exports of built-up cars earned $1.35 billion in 2011, a shuddering 63 per cent fall from the $3.69 billion three years earlier.

Holden has been the biggest victim, after General Motors ended exports of Commodores to the United States to protect jobs at its US plants. From 56,140 cars exported in 2008, Commodore exports shrank to 7811 in 2010.

But last year's victim was Toyota, now the only significant exporter of Australian-made cars. In 2008 it produced record exports of 101,668 Camrys and Aurions, but that dropped to 82,630 in 2010 and then to just under 60,000 last year.

Toyota spokeswoman Vesna Benns said the loss of $A earnings was even bigger, since export contracts are written in $US, and the $US has fallen sharply against the $A in the past year. Toyota's total export earnings, including sales of accessories, slumped from roughly $1.5 billion in 2010 to $1 billion in 2011, she said.

Total exports of Australian-made cars have fallen from a record 162,000 in 2008 to about 70,000 last year.

But total Australian exports grew 10 per cent in 2011 to a record $313 billion, with most of that growth coming from minerals, and the rest from farm exports. Imports grew 9 per cent to $294 billion, and the trade surplus rose from $15 billion to $19 billion.

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PM plays down job losses as 'growing pains'

PRIME Minister Julia Gillard has given a firm pledge to bring down a budget surplus in 2012-13, and played down rising job losses in manufacturing and office work as ''growing pains'' as Australia's economy moves to a higher level.

In a speech to the Australia-Israel Chamber of Commerce in Melbourne, she defended the higher dollar as recognition by global investors of Australia's economic strength and long-term prospects.

''Our success is driving the dollar,'' she said. ''In turn, the dollar is driving change, and in doing so it's making our economy leaner and stronger, forcing us to move more of our effort - more money, more equipment, more people - into the parts of our economy where we can create the greatest value.

''What is certain is our dollar is likely to remain relatively high for years to come.''

Ms Gillard also announced a new deal for vocational education students, allowing them to defer paying their fees until after graduation, in the same way as university students now do.

The government will also offer subsidised training places worth up to $7800 to students enrolling in entry-level courses in health, business, hospitality, construction, transport and other areas with skills shortages.

She gave an unequivocal commitment that the 2012-13 budget will be in surplus - implying further spending cuts and/or tax rises to offset deteriorating economic prospects.

The International Monetary Fund last month cut its forecast for Australia's growth in 2012 to 3 per cent, well below the 4 per cent the Reserve Bank forecast in November. By December 2012, this would fall to 2.5 per cent.

That would jeopardise Treasury's forecast of a thin $3.5 billion surplus in 2012-13, which assumes ongoing growth of 3.25 per cent. Chris Richardson of Deloitte Access Economics has urged the government to drop its surplus pledge and give priority to economic growth.

Ms Gillard rejected the advice. ''We will hand down a budget surplus in May,'' she said.

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Dollar set to stay high whatever the cost

FOR the 20 years to 2005, the Australian dollar averaged US70?. Now it fluctuates at about $US1.05.

If it is stays in that zone, as policymakers expect, that will make a huge difference to where our jobs are, what they are and what they pay.

It's already happening. The Bureau of Statistics says 127,500 manufacturing jobs have been lost since 2008.

That's devastation of factory work on the same scale as in 1990-91. The banks are tipped to move thousands of office jobs to India this year. Other businesses will follow. It is only a matter of time before government itself does the same.

Don't blame business. It either makes profits or goes to the wall. The 50 per cent rise in our dollar makes it 50 per cent more expensive to make things or do jobs in Australia than in the rest of the world.

You can't blame Ford or Westpac or Woolies if they shift jobs to places where they can be done more cheaply.

Yesterday Julia Gillard wanted to assure us this was a Good Thing.

She likened it to the "structural change" in the Australian economy after the Hawke government slashed tariffs in the depths of recession in 1991, with the job losses being just "growing pains". It was about "building a new Australian economy" that would be "more adaptable, more flexible and able to seize new opportunities than ever before".

Well, the businesses that survive a 50 per cent rise in relative costs will certainly have to be adaptable and flexible; that's why they will shift jobs offshore wherever possible. That will cut jobs in areas where we work in offices and factories, offset by job growth in areas with mines and pipelines.

That's why full-time jobs fell by 31,000 last year in the south-eastern states but rose by 40,000 in the north and west. On current forecasts, that will accelerate this year, as more companies adapt to the new reality.

The Australian dollar has not soared simply because the world sees Australia as a "safe haven". Since the start of 2000, the Aussie has risen 44 per cent against all other currencies, yet China's yuan rose just 16 per cent and South Korea's won actually went backwards.

Both China and South Korea have grown much faster than Australia in the past decade but they manage their currencies to keep them down so their manufacturers stay competitive.

Australia won't do that. The Reserve Bank has never intervened to stop the dollar rising, only to stop it falling. Both the Reserve and Treasury see this mining boom lasting for years and probably decades. On that assumption, they believe the dollar is in the right zone and if companies can't cope, that's their problem. Gillard agrees.

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Property market levels out, but city still slipping

AUSTRALIA'S year-long decline in house prices may be levelling out. Capital city home values fell in every quarter last year but the rate of decline was slowing, the latest figures from property analysts RP Data-Rismark show.

In the last three months of 2011, prices fell by 0.5 per cent, a smaller decline than the previous June and September quarters when they dipped 0.8 per cent and substantially less than a 1.5 per cent decline in the March quarter.

Last week, data provider Australian Property Monitors released figures which showed national house prices stayed flat in the December quarter.

At a state level, the figures calculated by each provider using different methods were more contradictory.

According to RP Data, Melbourne's house prices fell 1.4 per cent in the December quarter. But figures from APM and the Real Estate Institute of Victoria show values rising by 1.1 and 1.9 per cent respectively in the same period.

New Reserve Bank figures showed debt-shy households are becoming even more wary of borrowing. Annual growth in housing credit in 2011 was just 5.4 per cent, the slowest yearly growth ever recorded since the data was first tracked in 1976. Year on year, the entire national growth in housing loans was accounted for by a surge in loans to first home buyers in New South Wales. The Australian Bureau of Statistics shows that in the last months of 2011, NSW first home buyers rushed in before the state government axed their $20,000 stamp duty exemptions from January 1.

In the three months from August to November 2011, loans to first home buyers in NSW jumped 77 per cent, while loans to Victorian first home buyers fell 2 per cent. That surge will recede in 2012, casting doubt on forecasts that a recovery is under way.

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Column: A generous serve of point-scoring

AS WE climbed the steps into Rod Laver Arena on Sunday night, Hanrahan had never been happier - not because we were on our way to see Novak Djokovic and Rafael Nadal play off in the Australian Open final, but because there had never been so much bad economic news for him to bang on about.

Dr Pangloss had booked a corporate box for the Economists Club, using the money we made when he sold the club's beach house a few years back. I couldn't see why he didn't just book the club on an overseas holiday like everyone else now the dollar is so high, but perhaps Martin Ferguson leant on the Doc to get him to spend the money at home.

Still, it looked like being a memorable night between two evenly matched opponents. That was certainly how Hanrahan saw it - as soon as Dr Pangloss appeared, he let fly.

''OK, Doc, this is your moment of humility. This is the time you have got to admit for once that, in your eternal optimism, you got it wrong.

''Remember the budget last May? You were forecasting that the Australian economy would grow 4 per cent in 2011-12. You were predicting that we would add another 200,000 jobs, and the world economy would hum along. The Reserve Bank believed it so much that it was about to raise interest rates.

''Yet, instead, here we are on the brink of another global recession, with no cavalry left to ride to the rescue. On one hand, we've got Europe sinking into a deepening crisis that seems to have no way out. On the other, the US has become ungovernable, with even bigger budget deficits than Europe.

''Now even China is slowing; this time it won't rescue us. And the Australian economy is taking a belting from the high dollar, and growth has slowed to a standstill apart from the mining sector ?''

The good doctor looked puzzled. ''How many hands have you got, Hanrahan?'' he quipped. ''I count four, so far. This should be an excellent night: the best of all possible tennis players, in the best of all possible tennis venues, right in the heart of the best of all possible economies. I'm going for Djokovic. How about you?''

''I'm with the International Monetary Fund,'' declared Hanrahan. ''It's now warning that the world could face a repeat of the 1930s Depression unless Germany drops its demands for even harsher budget cuts by its neighbours. The IMF wants to allow Europe to grow its way out of trouble, but the German public and politicians don't understand that's the choice they face.

''And if the world economy goes down, we know what will happen to Australia. The markets for our coal and iron ore will shrink, prices will fall, and the high dollar and high interest rates have flattened everything else. Where will your 'best of all possible economies' be then?''

There was a roar from the crowd, but they were merely applauding a Nadal backhand. Pangloss smiled: ''Australia will be outperforming the major economies, as it has for the last four years. Yes, growth will not be quite what we hoped for in May. Our mid-year forecast trimmed that to 3.25 per cent, with our global forecast roughly similar to what is now the IMF's central forecast.

''And its central forecast is that the world economy will continue growing at around 3.5 per cent a year for the next two years. It's not forecasting a global recession ?''

''Because the IMF never forecasts a recession,'' Hanrahan butted in. ''Even in 2008 it didn't, yet its words showed that it expected one. And last week in Berlin its managing director, Christine Lagarde, sent a similar message.''

''? and for Australia,'' the Doc went on, ''the IMF predicts that next year we will grow faster than any of the major advanced economies: 3 per cent, against an average of just 1.2 per cent in the advanced economies. That's normal growth; even you can't interpret that as a recession. We are not at risk. Yes, growth in jobs has slowed ?''

''No, it's stopped!'' Hanrahan interrupted. ''The Bureau of Statistics trend estimates show full-time jobs have been going backwards since May, and part-time jobs since October.

''The forward indicators, job advertisements and job vacancies, are falling too.''

''? but those figures do bounce around,'' Pangloss continued, ''and a separate bureau measure finds total hours worked are growing steadily. The government is rightly giving priority to reducing the deficit so we can have the budget back in surplus by 2012-13. We will get there faster than any of the major economies, and our net debt by 2016 will be only a tenth of the average of the G7 countries. Great shot!''

It turned out the Doc was applauding Djokovic rather than Wayne Swan, but it was enough to make Gradgrind jump in. ''Doc, two months ago you forecast a massive $37 billion deficit for 2011-12, followed by three years of surpluses so skinny that any slowdown would knock them down. And if you don't make more spending cuts, that's exactly what will happen!''

Hanrahan turned on him: ''So you want us to make the same mistake as the Germans, and cut ourselves into a recession? I'm for growth. We should stop worrying about the debt and the deficit.

''Rudd's great achievement as PM was to use government spending to create a firewall against the global recession. Gillard or whoever replaces her should be ready to do that again, and scrap the surplus pledge and all those stupid fiscal rules like limiting spending growth to 2 per cent ?''

Dr Pangloss let out a strangled scream. The next thing, a bunch of security guys climbed in and hauled him away: apparently they thought he was some clown imitating Sharapova. Pity, he missed a really good match.

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Today, we start the heavy lifting on climate change

WHAT do you do when the world has a problem that can be solved only by global action but we have no global government to solve it?

Should each nation make itself pay its share of the cost, knowing that some others won't? Or should we try to shield ourselves from the pain until every other nation we want to compare ourselves with has already started the heavy lifting?

Today, after almost 20 years of debate, the House of Representatives will decide Australia's answer. Assuming no last-minute twists, assuming the Senate numbers hold, it will commit Australians to start paying their share of the global cost of reducing greenhouse gas emissions.

In effect, Australia will join Europe and New Zealand as the first countries to start the heavy lifting needed to reverse global warming. In the past century, average temperatures worldwide have risen by almost a degree most of it in the past 40 years.

Back in 1992, in Rio de Janeiro, the world's governments agreed that the risks of man-made global warming required them to find ways to reduce greenhouse gas emissions. You have to admit, we've been a bit slow to get going.

Even since 1992, global temperatures (on the rolling 10-year average) have risen by a third of a degree. Australia and other countries have tried to tackle the problem in light-handed ways. Big emitters have been required to monitor and publish their emissions. Governments of left and right have moved to ban the sale of filament light globes, limit new appliances to using 1 watt of electricity in standby mode, and to ban new electric water heaters where gas is available.

The one tough change we made was to cut the land clearing which had been one key reason for Australia's high greenhouse emissions. That reduced our emissions for a while, but they've rebounded since, and the experts say they are on track to rise 24 per cent from 2000 to 2020.

There are lots of political reasons why each party is where it is in this debate. But the main reason why Labor, the Greens and most of the independents have united to introduce a carbon tax is that the light-touch stuff is not slowing emissions enough. We need to start the heavy lifting, in the cheapest way.

Economists tell us this is the way. Start charging people for their carbon emissions, and you instantly get them thinking about how to reduce them. Put an economy-wide price on carbon and everyone has an incentive to find ways to avoid emitting carbon.

We've seen it before. When petrol prices rise, we use less petrol. With electricity prices rising, households are using less electricity. It'll be the same with carbon.

For households, Treasury forecasts, there will be very little impact on the prices of most things we buy. It will contribute marginally to higher prices in the supermarket and the department store, but far less than the GST did. Overall, Treasury estimates the impact on household budgets will be 0.7 per cent, less than a third that of the GST.

The biggest whack will be on power bills. Treasury says the tax will lift them 10 per cent. That will hurt just as the 70 per cent rise in Melbourne power bills over the past four years has hurt. If that hasn't changed your use of electricity, the carbon tax probably won't either.

But that's the aim of this tax: not so much to raise revenue, as to drive changes in the way we live. Its goal is for us to find ways of living with less. If Treasury is right, most households will actually be made better off, receiving more compensation than they pay in higher prices.

Those worse off will be the higher-income households, whom Labor assumes will be able to cope.

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Do we need industry when we have a mining boom?

THE drastic cuts at BlueScope Steel raise two key questions. Does it matter to Australia if we have a steel industry or not? And if it does, is it worth trying to keep it?

We could ask the same questions about whether Australia should keep making cars. We could ask the same questions about whether we should keep manufacturing anything.

The record dollar is slowly driving Australian manufacturers out of business. With each cent the dollar rises, their import competitors become cheaper and their exports more expensive.

From 1985 to 2005, the Australian dollar averaged US75¢. It has now risen 40 per cent above that to around $US1.05.

That shift has made imported goods 30 per cent cheaper - and our exports 40 per cent more expensive. Australian manufacturing is slowly being crushed. Why has the Australian dollar risen so much? Firstly, because our mineral export prices have risen to record levels and the Australian dollar tends to rise and fall with them.

Secondly, our interest rates are now far higher than in other AAA-rated countries, offering investors juicy returns. Also, the Reserve Bank keeps hinting that it will raise rates higher still.

Thirdly, while most Asian countries (such as China) keep their currencies low to boost local output, ours floats freely. The Reserve at times has intervened to stop the dollar falling, but never to stop it rising.

Nor would it. The Reserve is obsessed with the mining boom and thinks the big threat to Australia is inflation. To contain prices, it is reining back the other 90 per cent of the economy. Its hints of more interest rate rises keep pushing the dollar higher.
Does it matter if Australia becomes, in Kevin Rudd's words, ''a country where we don't make things any more''?

Treasury and the Reserve say it doesn't. They think mineral prices will stay high for decades, keeping the dollar too high for manufacturing to survive. They say we will ship out so many minerals, we won't need it.

Others see that as reckless. Mineral prices could fall sharply. But when factories close, they don't reopen.

To avert that would require big policy shifts, not Band-Aids. The risk is that we will lose manufacturing permanently for a mining boom that turns out to be only temporary.

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Clyde Holding - a true Labor guy'

National Archives

BENEATH the brilliantly coloured stained-glass ceiling, a galaxy of Labor and Aboriginal leaders past and present gathered yesterday in the Great Hall of the National Gallery of Victoria to farewell their quick-witted, combative, arts-loving larrikin mate, Clyde Holding.

Victoria's Labor leader from 1967 to 1977, then a federal minister in the Hawke government from 1983 to 1990, Mr Holding died aged 80 on July 31 in a Castlemaine nursing home. Yesterday, he was honoured with a state memorial service, where Premier Ted Baillieu sat stoically as former prime minister Paul Keating and others poured praise on a man remembered as "a true Labor guy".

Aboriginal leaders Mick Dodson and Marcia Langton paid tribute to the former minister for Aboriginal affairs who first put forward a national land rights act and handed Uluru back to its traditional owners.

Prime Minister Julia Gillard recalled that while Mr Holding's push for a land rights act was blocked by his boss, Bob Hawke, Mr Holding responded with typical cheek and courage by funding Eddie Mabo's ground-breaking native title claim in the courts  although the Commonwealth was the defendant.

Mr Keating led the mourners, recalling his old friend's elation when the High Court eventually upheld the Mabo claim and the Federal Parliament finally recognised native land title in law.

"He was a character, but a character with a heart and a soul and a sense of mission," Mr Keating said.

"He was funny, he was a raconteur, he was a showy man, but he was always a very serious man . . . He had the fight in him, he had integrity of purpose and he had compassion and understanding.

"He had imagination. Everyone imagines things, but Clyde was one of those who develop their own model of how the world could be made better and had the courage to follow it through thick and thin."

Professor Dodson said he had crossed swords with Mr Holding during his four years as minister for Aboriginal affairs, but found him "a thoroughly decent man, a man of his word . . . He gave us hope, he gave us some vision that the future might be different for us."

Former foreign minister Gareth Evans recalled other sides of Clyde Holding, such as the night they first met at a vigil outside Pentridge on the night before Ronald Ryan was hanged in 1967.

A video of Mr Holding's life ends with an image that sums him up. After the speeches at the Uluru handover  from which Mr Hawke, fearful of the white backlash, stayed away  a plane flies overhead trailing a hostile banner: "Ayers Rock for all Australians."

Mr Holding stayed watching it, his eyes squinting into the sun, his jaw jutting out in defiance.

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Shaky sharemarket fails to stir economy

THE Australian sharemarket is being thrown down, then up, as fear and hope fight it out on the global stage. But what does this mean for our economy?

Most likely, not much. Markets plunge and soar, but the economy is doing neither. All this year it's been muddling along, stuck in second gear. And it will probably keep on muddling along in second gear.

You wouldn't guess that from the sharemarket. At one point yesterday, a fortnight of fear and panic had wiped about $240 billion off the value of Australian stocks and knocked trillions of dollars off global wealth. That's a big hit.

But then, sharemarket money is not real, unless you're selling. The benchmark S&P/ASX 200 index hit 6829 in late 2007, sank to barely half that in early 2009, rebounded to just under 5000 last April, then started leaking slowly, until fears over the parlous fiscal state of US and European governments turned leak into flood.

The S&P/ASX 200 index closed at 4603 on July 22, then started sinking. By Monday it dropped to 3986, then yesterday to 3766 before abruptly flying back up to close at 4035. Traders attributed the rebound to heavy buying in their own markets by the Korean and Taiwanese governments.

That's probably not the strongest basis for a rebound in Australia or anywhere else. This play could have many scenes left. Confidence is fragile, and global confidence will stay down until there is firm ground to support it.

Last week's debt deal in the US was essentially a decision by the Republicans to keep the US from defaulting on its debts, but to block any long-term correction to the US government's unsustainable fiscal course while President Barack Obama is in office.

The markets, and ratings agency Standard & Poor's, saw this as a road to ruin. The Republicans set down markers (such as preserving tax loopholes) which would equally prevent a Republican White House from getting the US back on track. The markets were falling fast even before S&P stripped away Uncle Sam's triple-A credit rating.

About time, we Victorians might say. Remember how in the '90s, the ratings agencies demoted Victoria two notches  when even under the financial foot-binding of the old Loan Council rules there was no risk of Victorian governments defaulting on debt payments?

Yet last week, the US House of Representatives went to the brink of voting for such a default.

S&P has started to apply the same rules to the US as it applies in rating other governments. It knew this would lead to turmoil on financial markets, but judged it better to pull the plug now than to keep up the pretence that buying US securities is risk-free.

Bill Gross, who runs the world's biggest bond fund, PIMCO, applauded. "S&P demonstrated some spine," he said."They spoke to a dysfunctional political system . . . they finally got it right."

Fiscally, Australia is a sharp contrast to the US. Its net debt is only 6 per cent of GDP and projected to be back in the black next year. That might prove optimistic; growth is unlikely to be as strong as Treasury projects. But as former Reserve Bank board member Warwick McKibbin puts it, "surpluses are not the be-all and end-all of policy". If things do go wrong, Australia has one of the few Western governments in a position to respond a second time.

Whether things go wrong for us will depend more on what happens in China than in the US or Europe.

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The CPI is not a credible basis for policy action

TOMORROW the Reserve Bank board will decide whether to raise Australia's interest rates, lower them, or leave them unchanged. The consensus among economists and markets is that it will leave them unchanged. You hope they're right but it's not certain.

There is no data the Reserve focuses on more than the consumer price index. Its job is to keep inflation low, and the economy growing. The CPI measures whether or not it is succeeding. If inflation starts climbing too fast, it signals that interest rates need to rise.

Last week's CPI figures seemed to send that signal. The CPI climbed 0.9 per cent in the June quarter, and 3.6 per cent in the year to June well above the Reserve's target to keep inflation, on average, between 2 and 3 per cent over the long term.

Banana prices had a bit to do with that. But what really mattered was that the Reserve's measures of underlying inflation rose 0.9 per cent in the June quarter, after similar rises in March. The annual growth in underlying inflation was within the target range, at 2.7 per cent, but in the first half of 2011 it grew at an annualised 3.5 per cent again, well above the target.

Bankers Trust chief economist Chris Caton summed it up well. If this was the only data you had on the economy, he said, the Reserve would have a clear-cut case to raise interest rates. But it is not the only data we have. And the closer you look at it, the less clear-cut the case is.

The other data tells us that the economy is in a weak condition, outside mining and mining investment. That means the surge in underlying inflation is more likely to be a passing blip a rebound from very low rises in 2010 than the start of a dangerous rise.

A close look at the inflation data confirms this. The weightings given to items in the CPI are based on an old survey of household spending. But the Australian Bureau of Statistics changes them to reflect price rises and falls, assuming that we keep buying the same quantities of goods regardless of price changes. That defies reality, and over time, creates a bias that overstates the inflation rate, as the index increases the weight of items that rise in price, and decreases the weight of items with falling prices.

(We leave aside the third reason to be wary of pulling the interest rate trigger: the slowing global economy, and the serious risks facing it as a result of the prolonged budget standoff in Washington, and inevitable debt defaults by governments in Europe. This is no time for crazy braves.)

What do we know about the economy that should make the Reserve sit and watch for now? Plenty. The strength is largely confined to mining and mining construction. Weakness has now engulfed most of the economy. The broader-based the indicator, the clearer it is.

Jobs growth has slowed to a virtual halt. Even on the smoothed trend figures, the bureau estimates that Australia added just 38,000 jobs in the first half of 2011, compared with 188,000 in the second half of 2010.

There is no light on the horizon. The ANZ job advertisements index says job ads have been shrinking since April. The bureau's employer surveys report job vacancies shrinking since February.

The Reserve's own figures show credit growth has fallen to recession levels. In the first half of 2011, credit basically, the amount we owe the banks rose at an annualised rate of just 3 per cent. Even borrowing for housing is growing at just 5 per cent. Borrowing by business is flat.

Consumer confidence has fallen back to GFC levels. Business confidence is below sea level. In this environment, you need a very, very good reason to raise interest rates and the CPI is not it.

It shows inflation is low in most of its 90 sectors of consumer spending. In the year to June, a third recorded falling prices, a third recorded rises within or below the target, and a third recorded price rises above 3 per cent.

It is a similar story even in the first half of 2011. The unweighted median price rise of those 90 items was well inside the Reserve's target zone. But the weighted median was outside it, partly because the index over time overstates our spending on items with rising prices, and understates spending on those with falling prices.

Take bananas and computers. When this series began in 2005, fruit and vegetables comprised 2.1 per cent of our spending, and computers 1.5 per cent. But fruit and vegetable prices have soared since cyclone Yasi, while computers now pack far more power than in 2005.

But the bureau assumes we still buy just as many bananas, even at $12 a kilo, and buy 2005-strength PCs very cheap. So the CPI is estimated on the basis that fruit and vegetables now comprise 3 per cent of our spending, and computers just 0.5 per cent. And that is wrong.

Likewise the CPI seriously overstates our spending on tobacco, and understates spending on mobile phones. And when the weights are wrong, that means the data itself is also wrong.

The Reserve faces a tough call. But it must not jump at shadows. This is a weak economy; it has time to wait. The next CPI figures will be based on a 2009-10 survey of household spending. That will restore the CPI as a credible basis for policy action.

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