Australia: Rate Cuts to the Rescue

Recession jitters. Easing by the central bank. Talk of how tax policy skews consumer spending. All this sounds familiar, but the economy is Australia's, not America's.

Australia is slowing down, perhaps sharply. Real gross domestic product roared ahead at a 5% annual rate in the first half and then rose just 2.6% in the third quarter. A loss of 23,000 jobs in the fourth quarter suggests that real GDP was flat for the quarter or may even have contracted.

The losses continued into 2001, with another 3,500 layoffs in January. Full-time jobs alone fell 44,000, the largest decline in 10 years. The jobless rate has risen from an expansion low of 6.3% in July to 6.7% last month (chart).

First-half growth was fueled by the buildup prior to the Sydney Olympics and accelerated spending by consumers and builders to avoid the 10% goods and services tax introduced in July. Those purchases took growth away from the third quarter.

In addition, the slowdown is the result of past interest rate hikes by the Reserve Bank of Australia, but that monetary constraint is now being reversed, which should brighten the outlook. The RBA cut its overnight cash rate by a half-point, to 5.75%, on Feb. 7. The RBA cited a "noticeable" deterioration in the global outlook plus very tame inflation as reasons for the cut. Consumer prices rose just 0.3% from the third quarter to the fourth, and should end 2001 within the RBA's inflation target of 2% to 3%. The latest data on wage growth show that weekly pay rose only 0.3% in the three months ended in November, the smallest gain in two years. With labor markets already loosening, wages will not push up inflation this year.

The RBA's action follows a trend of Anglo rate-cutting around the world. The Federal Reserve, Bank of Canada, and Bank of England have all eased policy in the past two weeks. And with growth around the world slowing down appreciably, expectations are growing that these cuts will not be the last.

By James C. Cooper & Kathleen Madigan

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