Economic Outlook

Labour Force

Most forward indicators point to continued solid jobs growth over the next few months. The main labour market risk going forward concerns the current tightening cycle of monetary policy and its employment impact on interest rate-sensitive sectors of the economy. Wage growth is estimated to at 3.25% in 2003-2004 (Source: QLD Treasury).

Inflation to remain stable

Inflation in the domestically oriented sectors of the economy will continue at a higher rate, with the non-traded component of the CPI increasing. But in the short term, continued pass-through of lower import prices will dampen the overall inflation rate. As a result inflation should remain stable below 3%, with the RBA predicting it will be about 2_ per cent by the second half of 2005.

Interest rates – a 0.25% Cash Rate rise to come soon

The RBA increased the official cash rate by 25 basis points to 5.25% in December, following a previous rise of 25 basis points in November, providing similar reasons – including ongoing improvement in the global economy and domestic economy, upside risk to the medium-term inflation outlook in the domestic economy and excessive credit growth.

The trend of tightening monetary policy is expected to continue with a further increase in the cash rate to follow early in 2004. On the other hand, the cash rate is unlikely to rise above 5.75% in 2004.

Bonds

The tightening in monetary policy by the Reserve Bank of Australia in the last quarter of 2003 (RBA - lifting official interest rates by 50 basis points to 5.25%), had a major influence on the domestic bond market. Bond yields rose across the domestic yield curve during the quarter in both anticipation and response to the tightening in monetary policy by the RBA. At the end of the quarter, the yield curve was pricing in expectations for further rises in interest rates heading into 2004.

$A/$US – Some Further Strength Ahead

The $A/$US has hit new heights to recently trade at just over 80 US cents. This appreciation reflects some further weakness in the US dollar and favourable domestic fundamentals including a widening of the interest rate differential and a marked strengthening in commodity (especially base metal) prices. The $A/$US is expected to move only slightly over the 80 US cents barrier in the first quarter of 2004. On the other hand, assuming that the US dollar does not fall markedly further, the $A/$US could lose some ground during 2004, as commodity prices peak and interest rates in the US start to be lifted to more normal levels (Source: NAB).

"An economist is a man who states the obvious in terms of the incomprehensible".Alfred A. Knopf

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