Ocotber 08: ECONOMY: Divergent forces pull economy at both ends

Both domestic and international factors are currently shaping the fate of the Australian economy.

The global financial turmoil and its ramifications for Australia is a significant factor. The collapse of Lehman Brothers and the US Federal Reserve’s intervention to save AIG could create further challenges in international lending markets and tighten international funds. This could see the rates of interest on home loans in Australia increase.

At the same time, global financial disorder could further slow global economic growth and put downward pressure on global credit markets.

The second major factor is the divergent domestic economy. New figures show that the unemployment rate contracted from 4.3 to 4.1 per cent in July – in contrast to what the RBA had expected. Consumer confidence is also recovering slowly as the price of oil falls.

The boom states continue to grow well, adding to Australia’s GDP growth and making the RBA’s task of containing inflation an ongoing challenge. This in turn is also threatening the central bank’s ability to deliver more interest rate cuts over the next six months.

On the other hand, the New South Wales’ economy is shrinking and Victoria is not doing well. These two states would certainly benefit from further interest rate reductions.

Regardless of both international and national factors, the RBA will continue to cut interest rates over the next six months. It is likely the RBA will put rates on hold until it sees the next inflation figures due out this month however. This will also provide breathing space to better assess the global economy and the extent and speed of rate cuts required over the next six months.

Fariborz Moshirian, professor of finance at UNSW’s Australian School of Business

------------------------------

QUOTE-END-QUOTE

"Though the global outlook remains gloomy, and the prospect of a world recession is rising, there are no signs of economic contraction in Australia"

Melbourne Institute research fellow Edda Claus gives context to current global financial turmoil, 19 September 2008

MONTH IN NUMBERS

27.6 The amount, in billions of dollars, Lloyds TSB paid to acquire HBOS.

510 The median weekly rent in Darwin, the highest in any capital city.

37 Billion dollars –  approximate amount wiped off the ASX during morning   trading 18 September

765,230 The value, in millions of dollars, of home loans outstanding to Australian ADIs as of July 2008.

85 The sum, in billions of dollars, the US Federal Reserve invested to bail out the American International Group (AIG).

 ------------------------------

MUST READ REPORTS

• Financial Stability Review, Reserve Bank of Australia, 25 September 2008 www.rba.gov.au