As I move around the community and conduct radio interviews I find the same questions being asked about the economy. So today I have selected seven of the most popular economic questions and answered them.
1) When will prices for imported appliances and other goods begin to fall given the rise in the Australian dollar? And will it ever happen to petrol?
Retailers have locked in most of their Christmas purchases at Australian dollar levels much lower than today so the big price reductions will not take place until next year. Some retailers of course may need to re-order increased supplies at today’s dollar rate or may not have protected their currency position so they will do very well. Of course knowing costs are going to fall means that some retailers may get very aggressive in clearing out stock particularly after Christmas, or if Christmas retailing is slow.
In the New Year the retailers will try and hang on to their margins for as long as they can.
The petrol price is being boosted by the fact that traders are speculating on oil and boosting the price sometimes at a faster rate than the Australian dollar is rising. At some point that speculation will end and there will be a fall in the oil price and that’s when we will see real benefits to the price of petrol.
2) Why is the Australian dollar rising?
Australia is being classified as an Asian Pacific country and the base dollar rate is closely linked to Chinese economic activity, for which electricity production is a good proxy. However, our currency is rising faster than Chinese electricity production because we are one of the few countries that have begun to increase interest rates. Our dollar has also been affected by an avalanche of speculative money and given that interest rates have a lot further to rise there is no sign that this will end.
3) Why do we have to increase interest rates?
The Australian stimulus package was one of the strongest in the world and our economy was further boosted by the Chinese stimulus package which was probably the biggest in the world. This double whammy has boosted the Australian economy dramatically. We are seeing the combination of an increase in consumer and business confidence, higher share prices, a rise in house prices and strong commodity export prices. To this you can add enormous expenditure on infrastructure and a rising population. Australia is going to see a big rise in growth in the first half of 2010 with some commentators saying it could approach an annual level of 6% – that could be too high, but it is very strong. The Reserve Bank is concerned that inflation will break out – and even more dangerously, that it will produce a housing bubble. The Reserve Bank says that rates were made artificially low to stimulate the economy and must now be reversed.
4) Are the higher interest rates Kevin Rudd’s fault? And should he withdraw the stimulus?
Back in September/October 2008 Australia and the world faced a deep crisis. With the benefit of hindsight, Australia may have over-stimulated the economy but it is easy to make those judgements in hindsight. Had Australia not taken substantial steps we would have slipped into recession. Most of the flexible stimulus measures have been completed and what is left are the infrastructure projects. Most of the immediate ones have already been committed.
5) How far will interest rates rise?
Every economist in Australia is having a stab at this figure and over the next 12 months estimates tend to vary been 0.75% and 1.25%. If we assume a 1% rise we will not be far out. That converts to a mortgage rate of around 7%.
6) Which groups in the community will be the big winners?
There is no doubt that the biggest winners among Australians are those retirees and those approaching retirement who don’t have mortgages and have a large investment portfolio in their superannuation. These groups were the biggest sufferers in the slump but have recouped a large amount of their losses. Moreover, their houses have gone up in price and the money they are earning on bank deposits has also risen. They are feeling very confident. Those importing goods are benefiting from the higher dollar.
7) And who are the biggest losers?
The biggest losers are those that over-extended themselves to gain the first home buyers grant who will now struggle to maintain payments given the rise in interest rates. However, their jobs are now more secure than they were six months ago so they are not all losers. In the business community the biggest losers will be exporters and manufacturers who export and compete against imports. The tourism industry and education industry will be among the key sufferers. We are looking at a community that is undergoing an enormous change as it links to China, increases population and enjoys a higher rate of growth than countries like Europe and the US. But these changes will be with us for a long time.
This article first appeared on Business Spectator.
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