Inflation threat may mar economy's recovery
By Chris Zappone | thebigchair.com.au | 31 July
The jobless rate is likely to creep as high as 6.4 per cent by the final three months of the year, a modest rise compared with jumps in joblessness experienced in previous economic downturns, according to estimates by the institute in its latest Monthly Bulletin of Economic Trends.
That compares with the 5.7 per cent average for the latest quarter.
Hopes that the gradual rise in unemployment augurs a mild slowdown in the broader economy may be dashed, however, by an outbreak of inflation.
Such an output may trigger higher wages, said University of Melbourne professor Guay Lim. ''Inflationary pressure is on the rise, and attention needs to be paid to the growth in wages to ensure that the cost of labour is not detrimental to further job creations,'' the report said.
Indeed, the TD Securities-Melbourne Institute's monthly inflation gauge, released today, rose by 0.9 per cent in July, the most in the survey's seven-year history.
The Reserve Bank Governor Glenn Stevens also indicated this week that the central bank's attention is beginning to switch the risks associated with a stronger - rather than weaker - economy.
Mr Stevens also warned that the bank would be on the watch for a housing bubble should construction of new homes not keep pace with a pick-up in underlying demand. Chronic underemployment weighing on the labour market is cited as another risk to the economy's fragile recovery path.
Time to buy a house? The Melbourne Institute report also looks at the prospects of an emerging housing bubble, with some measures now the highest in eight years despite rising unemployment and an economy slowing.
''The emergence of a housing price bubble is a possibility as the bulk of housing activity revolves around established dwellings - only about 15 per cent is concerned with the construction and purchase of new dwellings,'' according to the report.
The Melbourne Institute's ''Time to Buy a Dwelling'' index dropped below 100 in July 2007, the report said, and remained there until October 2008, the same month the Federal Government announced a First Home Buyer's Grant boost.
''Since then more and more people are indicating that `now is a good time to buy a dwelling.' The Time to Buy a Dwelling index is now at about 140 points, levels like those seen in 2001.
The report notes that ''the perception of favourable conditions in the housing market is translated into financial and real activity.''
Melbourne Institute also predicts that economic growth is on track to hit 0.9 per cent in the December quarter, up from the 0.4 per cent expansion seen in the March quarter. That rebound, though, will come after two quarters of near-stagnation.
''While the slow-down seems to have bottomed out we do not expect a sharp rebound in growth in coming quarters,'' the report said, with June and September quarters expected to record growth just above zero. ''The impact of the current slow-down has not been uniform across the different sectors of the Australian economy,'' the report said with manufacturing, property and business services being among the hardest hit.
''Resonating the resilience of the Chinese economy, declines in mining have been much less pronounced than those in manufacturing,'' the report said, while the banking and insurance sector posted a small increase in the 2008-09 financial year.
czappone@fairfax.com.au
