Page 3490 - Week 08 - Thursday, 18 August 2011
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Global financial markets are being affected by this intense uncertainty, and as a result share markets are fluctuating wildly. We can expect continuing volatility, a continued focus on excessive global public debt and continued weakness in consumer spending in developed economies. And we can expect this to continue until market concerns and uncertainty can be appeased with clear policy responses from governments and from central banks.
Experts consider that there is little change in the economic fundamentals underscoring the global and national economies. In a recent statement, the International Monetary Fund projected that Australia’s real gross domestic product will grow by two per cent for the calendar year 2011 and by three per cent in 2012. This is expected to be on the back of strong demand for commodities and private investment in mining and LNG.
While there are some questions over the strength of the “developed economies”, particularly the United States and Europe, the outlook for developing economies, such as China and India, remains positive. If the international outlook worsens significantly, short-term domestic impacts are likely to come from a further loss in business and consumer confidence. This in turn would impact on private sector investment and employment, household consumption and the housing market.
Consumer confidence in Australia is currently at a relatively low level. The Westpac-Melbourne Institute survey of consumer sentiment shows its consumer sentiment index confidence is 24.8 per cent below its level a year ago. This was the situation, of course, prior to the events in the stock market of the last few weeks, and I think we can expect to see more. Financial market turmoil undermines consumer confidence and, in turn, falling consumer confidence is often associated with a slowdown in household consumption.
Household consumption is likely to remain weak for some time as households focus on protecting their balance sheets either by saving or by paying down debt.
The prospects of the Reserve Bank using its monetary policy levers in the short term are now less likely. This should, however, provide a stabilising effect on the national and domestic economy. Market volatility and some recent softer than expected domestic economic data could mean, in fact, that the RBA might not increase the cash rate in the near future as many commentators previously expected. There is, in fact, some prospect that the next movement will be downwards. This would provide some temporary relief to consumers and homeowners with mortgages and in businesses.
While the ACT economy continues to perform strongly, there is no doubt that downside risks to the budget in particular have increased. It is unclear at this stage whether these risks will transpire.
In comparison to many countries, Australia is well positioned to meet the challenges to our economy, and this is also the case for the ACT. Economic policymakers here and nationally have ample scope to react to any negative external shocks should that be required.
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