The Reserve Bank board meets tomorrow. It will be briefed by officials telling a story of unexpected economic strength.

The good news about the global economy can be summed up in three propositions.

  1. The dramatic falls in production and jobs in the major developed nations of the US, Europe and Japan are slowing, to the point that stabilisation seems not far away.
  2. China and other developing nations are still growing quickly although in China a sudden reduction in the pace of bank lending may enforce a slowdown in this half-year.
  3. Global goods and services inflation is subdued, although asset markets have been showing considerable resilience — the excess money created during the global panic has to go somewhere.

There is, of course, a vital caveat in each of these points, as the bank’s staff will emphasise in their presentations. And beyond the immediate caveats, there is the enormously difficult question of how central governments and national central banks can fine-tune the removal of fiscal and monetary stimulus as recovery gets under way.

Domestically, the good news is even better and less constrained by caveat.

  1. Unemployment has not so far risen nearly as fast as feared a year ago when the full horror of the global credit crunch was becoming evident.
  2. Retail sales have been surprisingly strong, buoyed by Kevin Rudd’s stimulus packages.
  3. Business fixed investment seems to be holding up better than expected, though still falling — i.e. (like global production and jobs) the pace of reduction is slowing.

The Reserve’s governor, the doughty Glenn Stevens, has already spoken of the need to restore interest rates from current “emergency” levels to more normal levels. But Stevens is unlikely to begin tightening just yet. But he may do so as soon as October and he is likely to be more decisive than in past times of recovery.

Rather than the traditional tiny 25 basis point increases, Stevens is likely to prefer a series of 50 basis point hikes.

Peter Fray

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