The following is the unedited transcript of the news release from Reserve Bank of Australia


Members Present

Glenn Stevens (Chairman and Governor), Ric Battellino (Deputy Governor), Ken Henry AC (Secretary to the Treasury), John Akehurst, Jillian Broadbent AO, Roger Corbett AM, Graham Kraehe AO, Donald McGauchie AO, Warwick McKibbin

Others Present

Guy Debelle (Assistant Governor, Financial Markets), Malcolm Edey (Assistant Governor, Economic)

David Emanuel (Secretary), Anthony Dickman (Deputy Secretary)

International Economic Conditions

The Board’s discussion of the world economy commenced with a briefing on the global growth outlook. The latest IMF forecasts were for growth in world GDP to be around 3¾ per cent in both 2008 and 2009, following expansion of around 5 per cent in the previous two years. While these IMF forecasts had been marked down by about ½ percentage point for each year from those published in January, they were in line with staff forecasts for Australia’s major trading partners made earlier in the year. They implied that the global economic downturn would be relatively mild compared with earlier episodes. The main driver of the slowing in growth was the weakness of the US economy and to some extent the other G7 economies. Good growth was still expected for the emerging economies, in particular China and other east Asian economies, albeit slower than in earlier years. Members discussed the relative importance of trade and financial linkages in transmitting economic developments from one country to another.

Turning to the United States, data on employment and retail sales in the past few months indicated that the economy was experiencing a downturn in line with those forecasts. Retail sales growth had slowed to 2½ per cent over the year to February, a similar growth rate to that seen in 2001/02, when the US economy went into a mild recession. Housing construction activity had continued to weaken and house prices were still falling. The main source of growth in the economy was exports, which were being stimulated by the low level of the US dollar exchange rate.

Economic growth in China had continued to be very strong, with industrial production still expanding by over 15 per cent per annum. Interpreting data on activity in the past few months had been made difficult by the timing of the Chinese New Year, but there was little sign of any slowing in the pace of growth. Inflation in China was rising significantly, mainly because of higher food prices.

Information on other economies in east Asia suggested that they grew in the early part of 2008, with strength in both industrial production and merchandise exports. Exports to the United States had slowed, but this had been more than offset by increased exports to other markets. Members noted that, as in China, increasing inflationary pressures were an emerging problem in several east Asian economies.

In Europe, members observed that there had been a slowing in the pace of economic activity, but not as marked as in the United States. Year-ended growth in industrial production had eased to around 2½ per cent and consumer and business confidence had continued to decline from the peaks in mid 2007; notably, business confidence remained well above its long-run average.

Domestic Economic Conditions

Members discussed the national accounts for the December quarter, which had been released the day after the previous meeting. The accounts confirmed that demand and output had increased strongly in 2007. GDP rose by 3.9 per cent over the year, with non-farm GDP rising slightly faster. The growth in domestic demand was much faster, at 5.7 per cent over the year, and had been met partly by rapidly rising imports, which reflected pressures on domestic productive capacity as well as the high exchange rate. Members noted that this was an environment conducive to rising inflation.

The strength exhibited in the national accounts was consistent with the picture of a strong economy coming from employment data. This was in contrast to the position a couple of years earlier, when relatively weak GDP and strong labour market indicators had been giving conflicting signals.

Members then reviewed information provided by the run of more timely data releases, covering household consumption, the housing and business sectors, commodity prices and the labour market.

Retail sales were flat in January, following large increases over the course of 2007. The staff’s liaison with retailers, which had been stepped up over the recent period, suggested that sales had been flat in the March quarter as a whole. Consumer sentiment had fallen sharply over the past few months, most likely reflecting tighter financial conditions and the financial market turmoil more generally. Motor vehicle sales had fallen in February, but it was not yet clear whether this marked a break from the strongly rising trend over the past two years. Members noted that rising sales of motor vehicles had not been matched by increased domestic production; the latter had remained fairly steady over the past decade, with a growing share of demand being met by imports.

Discussion turned to the housing sector. Members noted that activity had continued to be flat into the early part of 2008, after several years of little growth. Housing finance had softened in the past few months. Loan approvals as a proportion of housing credit outstanding were the lowest for some years and appeared to have fallen further in February, according to estimates based on bank lending. There were little reliable data on developments in house prices in the March quarter, though clearance rates had fallen in the major auction markets of Sydney and Melbourne in recent months.

In the business sector, investment had increased by 8 per cent over the year to the December quarter, in a continuation of the strong growth recorded since 2001. Mining investment was the fastest-growing sector over the past few years, but other sectors had also recorded large increases. Overall, the level of investment was adding to the nation’s capital stock at a higher-than-average pace, which would help to boost growth of the economy’s productive capacity. The latest capital expenditure survey pointed to strong investment plans in 2008/09, though members anticipated that some scaling back of these plans could occur in the period ahead.