Matilda Is Waltzing A Bit Too Fast

The land down under is bubbling over. Resource-rich Australia, heavily dependent on commodity exports, is thriving in the face of improving world demand and a favorable exchange rate. But its rapid growth is ringing inflation alarms.

Real gross domestic product increased by 1.3% in the third quarter, pushing the annual growth rate to 6.4%, the strongest performance in nine years and the fastest of any country in the industrialized world. Consumer spending leads the way, fueled by gains in jobs and real wages. Weekly earnings are growing about 4%, while inflation is a mere 2%. Business equipment investment continued to rise, lifted by a 17.5% annual pace of corporate profits.

The drought now ravaging eastern Australia produced last quarter's biggest drag on growth. Farm output plunged, and exports dipped slightly. But the export setback should be temporary, since the budding Japanese recovery is adding strength to the already vibrant Asia-Pacific region. The Australian dollar remains cheap, especially vs. the yen, giving Aussie exporters a big advantage. Meanwhile, imports jumped 8.5% in the third quarter, a sign of robust domestic demand.

Australia's ebullience should wane next year, however, and inflation is likely to move up. To thwart price pressures, the Reserve Bank of Australia (RBA) has already `wice lifted a key interest rate by a total of 1.75 points, to 6.5%. In light of the GDP data, the central bank may hike rates by a further full point much sooner than the markets had expected--perhaps within days.

Given strong growth, Treasurer Ralph Willis appeared to give the RBA the green light on Nov. 30, saying the government would give "serious consideration" to tax increases, spending cuts, and interest-rate hikes. Some fiscal tightening in the May, 1995, budget already seemed likely in order for the government to cut its deficit to its goal of 1% of GDP by 1997. Officials are not eager to repeat the '80s price spiral, even at the cost of a slower economy.

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