Fed: Economy ends year on a high, but with clouds gathering

AAP General News (Australia)
12-28-1999
Fed: Economy ends year on a high, but with clouds gathering

By Stephen Spencer, Economics Correspondent

CANBERRA, AAP - Australia ends the 20th century with an extraordinary combination of
low inflation, strong growth and falling unemployment not seen for over 30 years.

It's a combination which should see the nation entering the new millennium with unmatched
confidence.

But with interest rates rising for the first time in five years and the GST just months
away, many Australians remain uncertain about their future, scared of further change and
convinced the economic boom has passed them by.

With exports continuing to struggle under the weight of the worst economic downturn
in Asia since World War Two, it was domestic spending that drove the economy in 1999.

Retail sales boomed and home lending reached the highest level on record - but the
costs were high.

The amount outstanding on credit cards hit an unprecedented $12 billion, the current
account deficit topped $30 billion and foreign debt $239 billion.

Little improvement is expected in the current account deficit or foreign debt in 2000,
but consumer spending appears certain to drop back as the GST approaches.

Fears the GST will push up prices drove the home lending splurge, and also appear to
be the only explanation for the Reserve Bank's decision to start raising interest rates.

While inflation was prematurely declared slain by Treasurer Peter Costello, it was
still comfortably below the Bank's target range of two to three per cent and showing no
signs of exceeding it.

The GST is set to deliver a one-off hit to inflation and while this should quickly
pass through the system, the Reserve is taking no chances and is acting now to tap the
brakes.

The good news is that unlike the huge hikes of the late 1980s and the 2.75 per cent
increase in the mid 1990s, the increases will be in 0.25 per cent increments, and the
total increase should be no more than 1.0 per cent.

That should be enough to make consumers think twice about piling further spending on
to their credit cards and slow the housing and retail spending boom.

But with the worst of the Asian economic crisis now behind us, the world economy is
expected to grow strongly in 2000, lifting demand for Australian commodities and, the
government expects, neatly replacing any drop off in domestic demand.

That prompted the government to revise up its forecast for economic growth to 3.5 per
cent for the current financial year - still down on last year's result, but the eighth
straight year of growth - the longest expansion since the war, and probably the longest
in history.

That's now forecast to take unemployment below seven per cent and keep it there - something
not achieved since 1990, and then only for a short period.

It raises hopes that Australian can see five per cent unemployment, or lower, and usher
in a new golden era of steady growth, low inflation and full employment.

And yet across the nation, many people are failing to see the benefits of the boom,
with massive disparities opening up between the south-east corner - in particular, Sydney
- and the rest of the nation.

While the jobless rate in NSW has reached 5.6 per cent, in Tasmania it still languishes
around 10 per cent.

On the north shore and northern beaches of Sydney unemployment is below two per cent,
yet in the north of that state it is over 12 per cent. The north-west of Tasmania has
a recession-era 13 per cent.

Simply getting the economy to perform on a national scale is no longer good enough
to ensure everyone benefits, or guarantee re-election.

Mr Howard has acknowledged that with his plans for a social coalition to ensure the
benefits reach all Australians, and not just those in Sydney and Melbourne.

Just how difficult that will be can be seen from the options so far floated by Treasurer
Peter Costello and Workplace Relations Minister for lower wages for people in the regions,
or for those out of work for over a year.

Not surprisingly, the suggestion that after two decades of economic reform, the only
way those who have missed out can get a share is to cut their wages, was very quickly
shelved.

AAP ss/jmt/

KEYWORD: YEARENDER ECONOMY

1999 AAP Information Services Pty Limited (AAP) or its Licensors.