Aussie economy powers on

Commodity demand is thought likely to remain strong, even if in time new supplies may reduce some commodity prices. The price of oil had by mid-June breached the $US70 mark for long enough that international agencies and central banks became concerned enough to begin to talk about the need to tighten monetary policy.

China's contribution to this debate was to raise slightly bank reserve ratios. The most sensible interpretation of this, incidentally, is that it is designed to prevent further acceleration of China's growth rather than to slow growth absolutely.

So, the prospect is for continued strong demand for Australian exports, and strong investment by mining companies is beginning to create additional supply. The terms of trade may fall away a bit more (as they did in the March quarter) but they will remain high.

Within the Australian economy most of the economic statistics have been suggesting strength rather than weakness. Housing activity is picking up and it now seems the low point here was in the December quarter. Except in Sydney, the weakness of house prices may be over. In Western Australia, the housing boom has continued unabated.

Consumer confidence has recovered somewhat as memories of the most recent interest rate hike fade, and retail spending will soon be strong again.

Government spending is everywhere strong. Wages of public servants are marching strongly up, exceeded only by wage hikes in the mining sector. Overall wages growth is ratcheting up, but not to such an extent that improved productivity might not outweigh its effects on inflation. Most spectacular has been the reduction in the official rate of unemployment to below 5 per cent.

In Henry's view, this is a clear sign that the new industrial relations laws are encouraging job creation, by making it easier to fire non--performers.

Henry's many contacts in the business world report that their workers are more productive, sometimes noticeably so.

Against this there is a clear overall rise in CPI inflation. Most of the rise can be attributed to high petrol prices, and in the early part of 2006 this was seen as a reason not to panic.

But the international brotherhood of central bankers has decided dear oil might be persistent, and the Reserve Bank cannot ignore this opinion.

This explains May's rate hike, which at the time was widely assumed to end the debate here.

However, as general consumer demand revives, housing begins to pick up on top of strong business investment and strong government spending, the case for at least one more rate increase will become compelling.