Positive signs of a return to good health

In welcome news, the Reserve Bank of Australia’s latest Statement on Monetary Policy observed that economic conditions appeared to be stabilising and signs of a “durable recovery” were emerging.

In particular, the outlook for new housing construction has improved, suggesting price pressures in the economy are gradually abating.

Given the positive outlook, it seems the bottom of the interest rate cycle has arrived – and the only way is up.

According to NAB, improved economic conditions are likely to see the official cash rate rise to 4.5 per cent during 2010.

Prime Minister Kevin Rudd has indicated the government is not yet ready to call an end to the downturn and will push ahead with the remainder of its $77 billion stimulus program to guard against a spike in unemployment.

Earlier this year the government warned that unemployment was likely to reach 8 per cent before 2010, but recent data from the Australian Bureau of Statistics (ABS) suggests otherwise.

The latest ABS statistics confirm that the unemployment rate held steady last month at 5.8 per cent, seasonally adjusted, suggesting Australian businesses are riding out the economic downturn without having to resort to heavy job cuts.

But while prospects for the return to positive growth are good, there is still uncertainty over the speed of a recovery.

The International Monetary Fund (IMF) has indicated that while Australia’s economy has managed to outperform most other developed nations, expanding 0.4 per cent in the first quarter of this year, the near-term outlook remains highly uncertain, with our household debt and short-term external borrowing “high by advanced country standards”.

The IMF’s subdued outlook and expectation of a 0.5 per cent contraction in growth by end year is in stark contrast to the Reserve Bank of Australia’s forecast of a “durable recovery” and predictions of 0.5 per cent growth by December.