Reserve should hold rates - for now

Caution is needed in evaluating just how good it really is.

The good news about the global economy can be summed up in three propositions.

1. The dramatic falls in production and jobs in the major developed nations of the US, Europe and Japan are slowing, to the point that stabilisation seems not far away.
2. China and other developing nations are still growing quickly, although in China a sudden reduction in the pace of bank lending may enforce a slowdown in this half-year.
3. Global goods and services inflation is subdued, although asset markets have been showing considerable resilience - the excess money created during the global panic has to go somewhere.

There is, of course, a vital caveat in each of these points, and I am confident the bank's staff will emphasise the caveats in their presentations. And beyond the immediate caveats, there is the enormously difficult question of how central governments and national central banks can fine-tune the removal of fiscal and monetary stimulus as recovery gets under way.

In assessing the state of the Australian economy, there is considerable good news. My list of the three most important is as follows:

• unemployment has not so far risen nearly as fast as feared a year ago when the full horror of the global credit crunch was becoming evident;
• retail sales have been surprisingly strong, buoyed by the government's stimulus packages; and
• business fixed investment seems to be holding up better than expected, although still expected to fall in the second half of this year - that is, the pace of reduction is slowing.

The caveats to these domestic developments will presumably also be emphasised by the staff of the bank.

The first is that there is far more wasted resource in Australia's labour market than acknowledged in an official rate of unemployment of 5.8 per cent. This, of course, is helping to restrain wage claims and thus has some beneficial side-effects.

I hasten to add that reducing the wasted labour market resource is a task for government and its tax and welfare policies in particular. For the central bank, it can be no more than a fact that moderates the speed with which it removes monetary stimulus.

Strong retail sales, and the associated revival of consumer confidence, owe a lot to the stimulus packages.

The stimulus effect will fade - indeed needs to fade - as private, unstimulated activity builds.

Strong business fixed investment is a vital part of a strong ongoing economy, but the caveat is that, like overall activity in the major economies, it is falling less than expected, not (yet) rising in a strong and sustainable way.