Gloss rubs off Australia’s shiny economy

March 22nd, 2008 - 9:19 am ICT by admin  

By Sid Astbury
Sydney, March 22 (DPA) Unemployment at a 33-year low, a debt-free government, inflation in check and the best-ever terms of trade for Australia’s minerals delivering a 16th year of economic growth. No wonder Peter Costello (leader of the Liberal Party and served as Treasurer of Australia from 1996 to 2007) was predicting a year ago that Prime Minister John Howard’s conservative government would win a fifth election and he would stay on as treasurer (finance minister) beyond a dozen years.

“If you’ve got people in jobs, if people can afford their houses, if business is profitable, the politics will look after itself,” the famously cocky Costello said when delivering what proved to be his final budget.

As the November election showed, Costello got the politics wrong, arguably, he got the economics wrong as well.

Employment is holding up in the first flush of Prime Minister Kevin Rudd’s Labor government, but inflation has now pushed beyond the central bank’s three-percent target.

Prices and wages are rising notwithstanding the 12 consecutive interest rate rises that have pushed the cost of borrowing to 7.25 percent - the second highest in the developed world after New Zealand.

Despite record prices for coal, iron ore, gold and other in-demand commodities, the current account on the balance of payments has recorded its biggest-ever deficit as the strong Australian dollar crimps exports, sucks in imports and deters foreign tourists from visiting.

“The trade imbalance, in other words the gap between imports and exports, is running at about the worst that it’s ever been,” said Shane Oliver, economist with AMP Capital Investors.

The consensus is that Costello stoked the economy in advance of an election he expected the conservatives to win and that Rudd has been left with the difficult job of slowing it down.

Westpac Bank economist Anthony Thompson said it should have been obvious that an expansion rate of close to five percent was “beyond the long-term speed limits of growth for our economy before you ignite inflationary pressures”.

Wayne Swan, the new treasurer, delivers his first budget in May. He’s warning that just as monetary policy has been characterised by jacking up interest rates, fiscal policy will now have to be all about reducing both government and private spending.

“What we have is a relatively strong economy, but one that is absolutely shackled by very poor productivity growth and by capacity constraints that are pushing up inflation,” Swan said.

What he means by poor productivity growth - the lowest in 16 years - is employers taking on more workers but extra staff not translating into an increase in output.

Capacity constraints are all too evident in the difficulties householders have in getting a plumber and in the dozens of coal carriers parked off the east coast waiting days, even weeks, for their turn to be loaded an waved off to foreign ports.

Rudd disputes Costello’s contention he was bequeathed a strong economy.

Frank Gelber, economist with econometrics firm BIS Shrapnel, lists the problems of an economy that two years ago was being held up by the International Monetary Fund as the pattern for others.

“We have a very high dollar, encouraging imports, raising import penetration, we have got an investment boom with lots of investment goods being imported, and we still haven’t hit our straps with exports associated with the first round of mineral investments,” Gelber said.

The Reserve Bank of Australia (RBA), the central bank, has joined in the criticism of Costello, saying the big-spending Howard government became a competitor for scarce resources in the economy.

The RBA estimated that of the 334 billion Australian dollars ($310 billion) delivered by the resources boom a whopping 314 billion Australian dollars had been matched by increased government spending or election-driven tax cuts.

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