Posted: October 27, 2006

Slowdown to get slower!

The Australian Bureau of Agricultural and Resource Economics (ABARE) has forecast that as a result of the annualised impact of the drought on the nation's winter grain crops on GDP will be 0.7 per cent. With GDP growth currently stalling at 2 per cent per annum, this negative impact is substantial. The smart money is that the impact will actually be over 1 per cent per annum of lost production.

The impact will not stop with the lost crop production however. Urban households are already feeling the impact of higher fruit and vegetable prices combined with the stress they are feeling due to the petrol price hikes. In turn, the price rises have driven the Consumer Price Index up which this week showed no signs of falling off. The problem then is that the central bank (the RBA) has a Pavlovian response to this in the form of interest rate rises (two since May and more to come later in the year).

The impact of the interest rate rises will be strong this time because the household sector is holding record levels of debt with many on the precipice of bankruptcy and an increasing number already having gone over the edge (if you read the mortgagee sales figures of late). Once this all unwinds then the smugness of the Federal Government with its record budget surpluses will soon disappear as the cyclical impact on their bottom line drives tax revenue down and spending on welfare up.

At any rate, unemployment will rise as it is beginning to in the manufacturing areas of South Western Sydney, Australia's largest labour market. And with an election year now upon us, there is a crying need for some economic leadership from the Opposition. Sadly, it is lacking.

Blog entry posted by bill