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The porridge is too hot, Goldilocks

By Henry Thornton - posted Tuesday, 1 April 2008


All's well with the economy.

The US is heading for recession but the China boom will keep global activity strong.

Australia's terms of trade will remain high. Indeed, the current round of price negotiations will produce further increases.

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Inflation is up, likely to reach an annual rate of 4 per cent or so, but should be down again by 2010.

Aggregate demand has been growing far too fast, but consumers have lower expectations and growth of private demand will be reduced.

Government demand will be reduced as the Rudd Government tightens fiscal policy.

Productivity has slumped but this is partly due to the drought and partly due to mining investment to expand capacity. A more important reason is waning effects of past economic reform. A new, reformist Labor Government is, however, poised to reintroduce productivity growth.

Australia's CEOs think all is well, just so long as interest rates are not raised further.

This is the Goldilocks view of the economy. It is now admitted by the commentariat that it has been too hot for comfort but now it is just right.

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Like all good fairy stories it is just believable, especially if the listener or reader believes in bears that talk and fairies at the bottom of the garden.

There are two clear indications of an over-stretched economy - inflation and the current account deficit (CAD).

This column has focused on inflation for some years now, with little support from others. Last week, the Prime Minister's climate change guru and leading economist, Professor Ross Garnaut (a rare supporter of Henry's views), pointed out that: "Inflationary pressures that have been building in the economy since 2005 are now deeply entrenched and will be difficult to remove."

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First published in The Australian on April 1, 2008.



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About the Author

Henry Thornton (1760-1815) was a banker, M.P., Philanthropist, and a leading figure in the influential group of Evangelicals that was known as the Clapham set. His column is provided by the writers at www.henrythornton.com.

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