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Oil prices hit a new high and prompt G8 fears

7 June 2008

Oil prices have hit a new record of $US139.12 a barrel. The rise poses significant problems for major economies already hit by the fallout from the US sub-prime mortgage market and ensuing fears of a potential US recession. Oil prices had eased earlier in the year after many economists began to predict a soft-landing for the US economy; the US dollar began to stabilise and damaged credit markets signalled a potential emergence from disorder. However, the combination of recent rises in the US unemployment rate and the specter of higher interest rates in Europe prompted a sharp fall in the US dollar. As the price of oil is pegged to the US dollar, falls in the greenback are accompanied by gains in oil prices. In recent times, high oil prices have been driven by a few principal factors. In particular, the falling US dollar, political instability plaguing the Middle East, rising demand from major developing economies and a prolonged surge of speculative transactions around oil prices have all contributed to their historic rise in recent times. The rise also prompted significant concern from the 11 nations represented at a recent G8 meeting hosted by Japan. Collectively, the nations called for major oil-exporting nations to increase investment into energy sectors and lift production in order to meet growing global demand and partially offset rising oil prices.

Stronger than expected growth figures renew fears of further rate rises

4 June 2008

Contrary to expectations of a sharp slowdown in Australia’s economic activity, official growth figures for the first quarter have proven stronger than expected. Sound business investment and resilient consumer spending have prompted a 0.6 per cent increase in GDP for the first quarter of 2008 and a 4.4 per cent increase over the year. Prior to the release, financial markets had expected a 0.2 per cent increase for the first quarter and a 2.8 per cent increase over the year. And whilst Treasury has predicted that growth over 2007-08 will slow to 3.25 per cent, at current trends this seems unlikely. While household spending contributed to growth, it still fell to 0.7 per cent in the first quarter, down from a 1.7 per cent jump in December 2007. Overall, however, the economy’s apparent resilience to higher interest rates, soaring fuel prices and a more uncertain global economic climate has sparked fears of further interest rate rises by the RBA in their attempts to reduce demand and soften domestic inflationary pressures. After an aggressive tightening of monetary policy between August and March, the RBA decided to leave interest rates on hold yesterday at their 12-year high of 7.25 per cent. However, today’s stronger than expected data prompted speculation of future rate rises, leading to a minor surge of speculative transactions around the AUD and a half-a-cent rise in its value against the US dollar.

Australia's CAD continues to widen

3 June 2008

Australia’s current account deficit widened further in the March 2008 quarter, moving upwards from 6.1 per cent of GDP in December 2007 to 6.4 per cent of GDP in March 2008. The widening deficit, driven by weaker export figures, was primarily a consequence of flooding in Queensland and Western Australia, resulting in the closure of various shipping ports and mines and thus lower exports of coal and iron ore. However, rising servicing costs for Australia’s $725 billion foreign liabilities stock continued to drive the record-high net income deficit, which stood at 4.2 per cent in March 2008. Nevertheless, recovery from flooding is expected to prompt a bounce-back in commodity exports throughout the next quarter, leading some economic commentators to suggest that the recent widening of the CAD is merely a short-term aberration that does not hold any larger implications for the Australian economy.

WTO criticises US anti-dumping practices

15 May 2008

In a recent dispute settlement proceeding at the end of April, the WTO firmly criticised a US anti-dumping procedure described as ‘zeroing’ – a method of manipulating price comparisons between imported and local goods to make imports appear to be “dumped” goods, thereby allowing the local country to impose compensating duties under WTO rules. While this manipulative practice has now been struck down by the WTO, the US has in return criticised the Dispute Settlement Body for “making” WTO rules, rather than simply “interpreting” them, as it is designed to do. This continues a series of high-profile decisions made by the DSB in 2008, including its first decision against China taken in March this year.

Global food crisis becomes top priority on development agenda in mid-2008

10 May 2008

In recent weeks, senior officials at top development organisations have warned about the prospects of an impending global food crisis. According to the World Bank, food prices have doubled in the past three years, with a 40 per cent increase in the past ear alone, and almost 100 million people face the risk of grave malnutrition in 2008-09, largely in Africa and Asia. Leading politicians around the world have responded by promising increased levels of food aid, with the USA announcing that it will offer US$770 million in food crisis aid to developing countries in early May 2008, in addition to US$550 million already being considered. The current food shortages may constitute the first real food crisis since the Second World War.

US Interest Rates continue to fall, placing increased pressure on the RBA

30 April 2008

The US Federal Reserve has cut official interest rates to 2 per cent, their lowest level since 2004, and widening the interest differential between Australia and the US to 5.25 per cent. The US Federal Reserve has cut official interest rates seven times since September 2007, indicating the concern that the central bank has to avoid a US recession. The effects of the global credit crunch has meant that banks are finding it increasingly difficult to obtain funds, and are raising their own interest rates independently of the central bank (a similar thing is happening in Australia where banks are raising mortgage rates by more than the pace of increases in the official interest rate) – this has meant that the decrease in borrowing rates throughout the US economy have not fallen by as much as the change in the official rate suggests. The reduction in US rates places an increasing dilemma on Australia’s Reserve Bank. With new inflation statistics showing that inflation is well above the target band, it seems that the RBA may have to increase interest rates further to bring inflation under control. Yet the risk is that with further interest rate rises, the already-strong Australian dollar may appreciate further (due to increased speculation on the back of the widening interest rate differential), harming Australia’s export performance and encouraging import consumption.

Australian dollar reaches its highest levels since 1984

28 April 2008

The Australian dollar has risen past $US0.95 in April 2008 as the combination of higher interest rates and a rising terms of trade continue to drive the highest appreciation since 1984. The Australian dollar broke through the $US0.95 barrier on 24 April 2008 with news that the inflation rate has risen well above the RBA's expectation of 4 per cent. This has raised the likeliness of further interest rate increases in 2008 – and with the US and other developed economies looking to cut US interest rates, the widening interest differential is likely to keep the dollar close to its record highs, or cause it to appreciate further.

Inflation reaches 4.2% in March 2008

24 April 2008

Headline inflation rose by 1.3 per cent in the March quarter of 2008 to reach an annual increase of 4.2 per cent. The largest increases came in the prices of education, health, food and housing. Underlying inflation (which removes the effects of once-off price changes) has increased just as sharply, rising by 4.1 per cent. Despite the string of recent interest rate rises, it appears that consumption has remained relatively unaffected – with consumption contributing 3.6 per cent to Australia’s growth rate in 2007. The outlook for inflation over the next year remains high – oil prices are expected to increase further, low housing vacancies will continue to push up rents and the RBA has estimated that imports prices are expected to rise, particularly from China. The higher outlook for inflation will place increased pressure on the government for a contractionary budget this April.

OECD demands higher levels of aid for poor countries

15 Feb 2008

The OECD has criticised the slow pace of increasing aid to the world’s poorest countries, in its recent Development Co-operation report. Between 2002 and 2006, foreign aid to the group of Less Developed Countries (LDCs) has increased from US$57.8 billion to US$77.8 billion, but this remains below the amount needed to sufficiently stimulate infrastructure investment and other measures needed to accelerate growth in the world’s poorest regions. This call for increased aid is especially relevant coming from the OECD, which is an organisation established by the world’s richest economies. In order to achieve the Milennium Development Goal of reducing by half the number of people living on below $1 per day, the OECD argues that developed economies will need to increase their development aid contributions by 12 per cent by 2010.

RBA concerned by the prospect of sustained high inflation

12 Feb 2008

The RBA remains concerned by the risk of ‘uncomfortably’ high inflation in the short and medium-term, according to its Quarterly Statement on Monetary Policy released on February 11. While the global economic outlook remains subdued, the RBA pointed to the robust performance of the Australian economy, which continues to be affected by scarcity in the labour market and high utilisation rates of existing infrastructure. Although business investment in productive capacity has been increasing, the RBA believes that this is unlikely to resolve inflationary pressures in the short-term. As a result, the RBA acknowledged that monetary policy is likely to have a ‘tightening-bias’ over the next year.

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