Economy round-up: economic conservatism the new black

When Kevin Rudd promised in his campaign speech yesterday to spend less than John Howard, the response of the attending crowd of Labor true believers was unusual: they cheered.

It is a sign of the times that Labor, traditionally regarded as the party of higher government spending, is now more excited by Rudd’s proclamations of fiscal conservatism that just about anything else.

It reflects just how widespread concerns about inflationary pressures in the Australian economy have become. Today, however, there are mixed signs on just how likely those pressures are to result in an interest rate rise sooner rather than later.

Average weekly earnings increased 1% in the three months to August 2007, pushing the yearly average weekly wage increase to 4.9%. Although the 1% increase is down from a 1.7% increase in the three months to May, it is remains strong enough to suggest a tight job market and ongoing wages pressure.

On the other hand, the Melbourne Institute consumer inflationary expectations index for November has fallen slightly, albeit from record highs the previous month. Consumers surveyed believe inflation will increase by 4.4% in annual terms this month – still well above the Reserve Bank’s 2% to 3% target band – but down on last month’s 4.6% figure.

But there was another event yesterday that arguably should be of more concern for inflation in Australia, although it is good news for the global economy.

Richard Fisher, the chief executive of the Federal Reserve Bank of Dallas and a high-ranking figure in the US Federal Reserve, is visiting Australia at the moment and he has a clear message: the US is not about to fall into recession.

Fisher says that despite the US’s ailing housing sector and worries about the ongoing impact of the sub-prime crisis on its financial sector, it is still most likely that the “US economy will continue to expand at a sustainable pace”.

That’s good news for the US and the global economy. But given that the RBA nominated a weakening US as a key factor that could take pressure of the Australian economy in the future, it could be that we’ll continue to need a fair bit of that economic conservatism for some time yet.

On the markets today, the S&P/ASX 200 at 1.30pm was 6589.3 points, down 0.1% on yesterday’s close. At the same time, the Australian dollar was trading at US89.91¢, down on yesterday’s US90.34¢ close.


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