Reserve Bank of Australia governor Glenn Stevens has said in his testimony to Parliament that while there is a chance the economy could still contract, the global economy is clearly on the mend.
Stevens said that while the current official cash rate of 3% is an emergency measure to stimulate the economy, the RBA will eventually decide when to increase rates.
“There will come a time when the exceptional monetary stimulus in place at present will no longer be needed. It will then be appropriate for the board to do what it has done on past such occasions, namely to start adjusting interest rates back towards normal levels.”
“On the timing of when we might adjust policy, that’s an issue about which one keeps an open mind at this point, obviously,” he said. “When we reach the point of judging that this exceptional degree of stimulus isn’t needed, it will be the right thing to do to start removing it before it’s excessive for too long.”
He also gave a relatively optimistic report on the state of the world economy.
“Things abroad hardly look rosy, but they look distinctly better than they did a few months ago. Conditions in international financial markets have continued to improve.”
“In addition, it appears that the really large contractions in major countries’ GDP are now behind us and that global output is levelling out. International trade and global industrial production have even recorded small gains over recent months.”
But Stevens warned that “the global economy could suffer another setback”, although admitting the likelihood of such an event “has declined”.
Meanwhile, both Germany and France have escaped from economic recession, giving credence to reports that the world economy is beginning to stablise.
German GDP grew by 0.3% during the second quarter, following a disappointing contraction of 3.5% during the first quarter, while France GDP also increased by 0.3% following a contraction of 1.3%.
“The data is very surprising. After four negative quarters France is finally coming out of the red,” French economy minister Christine Lagarde said on RTL radio.
But the news wasn’t so good elsewhere in Europe, with the 16-nation strong Euro Zone recording a 0.1% drop in GDP, following a 2.5% contraction in the first quarter. Italy’s GDP fell by 0.5%, Austria and Belgium contracted by 0.5% while the Netherlands also shrank by 0.9%.
Australian market gains after flat results on Wall Street
Back home, the Australian sharemarket has opened higher today despite flat results on Wall Street, where corporate results helped negate bad news from official economic data.
The benchmark S&P/ASX200 index was up 50.2 points or 1.13% to 4486.1 at 12.05 AEST. The Australian dollar also increased, moving up to US84c.
NAB shares increased by 3.4% to $27.86, while Commonwealth Bank shares also moved up by 0.8% to $47.90. ANZ shares moved up by 2.5% to $20.71 while Westpac increased by 1.9% to $24.72.
Fortescue Metals has entered a trading halt before it completes an undisclosed negotiation, with a statement expected no later than 17 August.
The company said earlier this week that it is currently in negotiations about securing more financing to fund the firm’s expansion plans, including a $1 billion bond with the Chinese wealth fund China Investment Corp.
Property group Centro has said that it is unaware of a reason for the recent lift in its shares, which have increased by as much as 3% to 16c.
“The group has no reason to think that there may be a change in Centro’s operating profit before abnormal items and income tax so that figure for the financial year to June 30 2009 would vary,” Centro said in a statement.
Jobless data, retail figures keep Wall Street results low
Overseas, Wall Street recorded rises despite gloomy economic data. The Commerce Department released data showing retail sales fell by 0.1% during July despite an increase of 0.8% during June. Analysts had expected an increase.
Additionally, new data from the Labor Department showed applications for state unemployment insurance benefits climbed by 4,000 to a seasonally adjusted 558,000 from last week, indicating the economy may not be stabilising as quickly as some had thought.
But better than expected results from Wal-Mart, the world’s largest retailer, helped negate the bad results. The Dow Jones Industrial Average gained 36.58 points or 0.39% to 9398.19.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
