THE BIG PICTURE: Why Gillard was right to tell Europe to focus on growth

Last Monday, the Prime Minister made an address to the G20 leaders’ summit – the leaders of the largest 20 economies on the planet. In the address, Julia Gillard outlined the economic successes achieved by Australia over the last few years – a time dominated by the global financial crisis and the European debt crisis.

Was the Prime Minister wrong to outline Australia’s economic achievements? Certainly not. Australia is one of the few advanced economies that avoided recession in recent years. Australia has low inflation, low unemployment and is posting one of the strongest growth rates of advanced nations.

What is unfortunate is the fact that some commentators interpreted the speech as Australia lecturing Europe about the way to achieve a successful economy. The speech should have been seen merely as a case study – how one country survived the economic trials over the past few years.

But clearly the current government had a fair degree of help in overcoming the economic crises. One particular advantage is China. China’s industrialisation is occurring at just the right time for Australia. If the Chinese economy wasn’t so strong, if it hadn’t applied significant stimulus to its own economy and if China’s economy wasn’t so dependent on raw materials for growth, then Australia’s experience over recent years would have been far different.

Then there are the reforms provided by the Hawke and Keating governments: the floating of the dollar, and financial deregulation; labour market reforms. Then there was the introduction of the GST in the Howard era; the independence of the Reserve Bank; and there was also the budget surpluses and debt repayment of the Howard/Costello years.

Australia’s successes in recent years were achieved by a combination of luck and good management. And, indeed, it is right to acknowledge the contributions played by successive governments. In an international forum, politics should not play a role. But the Prime Minister is right to extol the virtues of growth and fiscal discipline as a recipe that other countries can follow – especially Europe.

The week ahead

The final week of the 2011-12 financial year is upon us. And it is fair to say that the year is set to end with a whimper rather than a bang. There are no ‘top shelf’ or market-moving indicators to be released over the coming week.

On Tuesday, Reserve Bank assistant governor (financial markets), Guy Debelle, delivers a speech in Adelaide. As is always the case with RBA officials – when they speak, we pay attention to ensure that they don’t drop hints about interest rates or monetary policy settings more broadly.

On Thursday, the Australian Bureau of Statistics (ABS) releases the March quarter Financial Accounts. This publication is a treasure-trove of information. Not only can we glean the latest figures on household financial wealth, but we can also assess the state of corporate balance sheets, determine whether foreign investors have been buying our shares and bonds and assess the financial asset holdings of superannuation funds.

Also on Thursday, the ABS releases figures on job vacancies, while the Housing Industry Association issues data on new home sales for May. In April, new home sales lifted from 11-year lows, rising almost 7% in the month. The hope is that this is the start of recovery. And there are good grounds for optimism with state governments providing much needed assistance for construction and purchase of new homes in the latest budgets.

The data on job vacancies should prove interesting. While there are high profile job cuts being announced by large companies, beneath the surface, small and medium-sized companies are scrambling for staff. At the same time, all companies are seeking to extract greater productivity benefits from employees.

On Friday, the Reserve Bank releases the latest private sector credit data. These figures are largely ‘ancient history’ as they represent loans outstanding by financial institutions. New lending is added to the ‘stock’ of loans each month, while older loans are paid down or paid off. We tip a 0.4% gain in credit in May.

Also of note will be the ABS releases the June Social Trends publication on Wednesday, while, on Friday, Australian Economic Indicators and tourist accommodation figures are released. Many motels are in good shape, courtesy of the mining boom.

In the US, the week kicks off with the release of the Chicago Fed index, new home sales data for May and the Dallas Fed manufacturing survey. Economists expect that new home sales were little-changed in May, consolidating the gains of recent months.

On Tuesday, the Standard & Poor’s/Case Shiller home price series is released. Overall, there is good support that the housing market is in recovery mode – a source of encouragement for investors. Home prices rose 0.1% in March and a 0.2% increase is expected in April.

Also on Tuesday, the influential Richmond Fed manufacturing index is scheduled to be released together with Dallas Fed indexes and the consumer confidence index for June. Economists expect that the confidence gauge eased from 64.9 to 64.0 in the month.

On Wednesday, data on durable goods orders is released alongside the Chicago Midwest index and pending home sales index. The data could signify that the economy is exiting from its ‘soft patch’ with durable orders tipped to lift by 0.5% and pending home sales expected to rise by 1.0%.

On Thursday, the final estimates for US economic growth in the March quarter are issued while figures on corporate profits and weekly claims for unemployment insurance are also released. The US economy grew at a 1.9% annualised pace in the March quarter.

And on Friday, personal income and spending data is issued together with the Chicago purchasing managers’ index and the Reuters/ University of Michigan consumer sentiment data. Also of note, the European leaders meet over Thursday and Friday. There are big issues to be discussed, hopefully with some success in ensuring closer integration of the economic grouping.

Sharemarket, interest rates, currencies and commodities

In Australia the financial year is coming to an end. In other economies, the focus is on the end of the month and the end of the quarter. But the one common feature will be the likelihood of “window dressing”. This is the practice where ordinary fund managers and hedge funds attempt to buy and sell securities with the aim of improving their performance figures before books get ruled off. So expect to hear plenty of rumours (with the aim of generating volatility). Investors, closely watch the best and worst funds in order to set their strategies for the coming quarter or year.

In Europe, bells go off when bond yields hit 7%. The perception is that when a country hits this magic figure then it becomes a candidate for a bailout. Clearly it’s not that simple – debt burdens differ with country size. Spain is five times the size of Greece, Portugal or Ireland.

Craig James is chief economist at CommSec.


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