It’s official — economic recovery with low inflation. Treasurer Peter Costello has a well earned gloat and pledges no leadership challenge.

Cossie argued that the economic prosperity is not unlike a house of cards — “extremely delicately poised” — and therefore any Labor-induced upside shock to inflation would send the whole thing crashing.

The figures are certainly impressive. Official unemployment fell to 4.2% in May, seasonally adjusted, from 4.4% in April. That’s right, close to 40,000 new jobs were created in May (close to 310,000 since May 2006), pushing the amount of unemployed to just 463,000.

Although these figures are clearly lower than actual unemployment levels, as Henry has argued, the downward trend, as this chart makes clear, means that there are more and more jobs being consistently created.

National account figures provide further good news. Despite the once-in-a-thousand-year drought that cut farm production by 0.2% in the Quarter (23% through the year), ABS data showed that first Quarter gross domestic product grew by a seasonally adjusted 1.6% after an upwardly revised 1.1% growth in the fourth Quarter of last year. This helped to lift the annual rate to 3.8% after an originally reported 2.8% in the year to December.

One of the most pleasing aspects of the data was the apparent recovery of the traditional engine room of the economy, New South Wales. NSW final demand — a proxy for economic growth — grew 1.2% in the March Quarter following a 1.4% rise previously.

These strong figures surprised most economists — a Bloomberg survey showed median expectations were for a 1.2% rise for the Quarter. The Australian dollar consequently moved to its highest level since 1989, before retreating marginally to be buying 84.65 US cents this morning.

That high growth rate also raised the chance of a July rate rise, according to the implied yield on the Sydney Futures Exchange’s interbank cash rate futures, from 4% to 22%. Market expectations of a November rate rise climbed from 72% to over 100%. Of course, these figures will decrease if the moderate inflation figures we have seen over the past two Quarters continue through 2007.

So it’s the nirvana economy, folks, and on with the John ‘n’ Pete show. Cossie used the opportunity afforded by the release of this great economic data to reiterate that he’s not going to challenge the PM before this year’s poll. He knows full well that risking a change of jockey when the horse is running so well is unnecessary — Henry wonders if the Australian public do too. 

Read more at Henry Thornton.