Three strikes hit hard to stall economic growth

DURING the past week we have seen the key gauge of commodity prices, the CRB Futures Index, hit a 17-month low, housing starts fall 2.7 per cent to an 18-year low and tourist arrivals fall 7.7 per cent. What does all this mean for us in Australia?

Commonwealth Securities chief econo-mist Craig James has examined these three issues in turn. In the case of commodity markets, he sees that the relatively abundant supplies and weak demand have caused the predictable result of lower prices. He expects that slower economic activity globally will continue to cap the commodity prices in the short term, creating downside risks for the Australian dollar and a number of resource companies.

Outlook for the year 2002 is more positive on his expectation of a recovery in global growth. The key commodities that caused the falls were the coffee prices, which were at a nine-year low and cotton, at a 15-year low. Crude oil also fell by 98 US cents a barrel to its weakest level in 12 weeks.

The Australian dollar is largely seen as a commodity currency, as commodities account for around 55 per cent of Australian exports of goods and services.

In the longer term there has been a close relationship between commodity prices and the Australian dollar. This relationship can change over time and fluctuate around a level.

Currently, the sharp drop in commodity prices has not been reflected in a major loss of support for the Aussie dollar. The major issue here is whether a slowing world economy is going to unduly affect the Australian dollar. It would seem that there are more downside risks than there are upside risks at this stage.

Housing commencements, as indicated above, fell to an 18-year low when they fell 2.7 per cent in the March quarter. The 27,603 dwellings that were commenced in March are just less than 40 per cent below the figure for March of last year. This was largely because of the imposition of the GST last year.

The comfort that Mr James derives is that the housing pipeline is comprised of a finance commitment, followed by a building approval number and then the com-mencement and completion of the work involved.

The recent finance commitment figures are showing some strong recovery and building approvals in recent months have also been stronger. This will reflect in increased dwelling commencements and completions in coming months. No doubt there are numbers of homebuilders who will be cheering this thought.

Tourist numbers are down in May 2001. The fall in numbers of short-term visitors is around 7.7 per cent, in seasonally adjusted terms. It is now around 388,500.

The drop in numbers suggests that the Olympic Games gloss appears to have faded just a touch. The Games and the weaker currency certainly helped to give the numbers a boost but that is now fading to a distant memory.

While Mr James is optimistic about the outlook for 2002, 2001 appears to be more of the sideways movements than any perceptible rise in the growth rate of our economy. Interestingly, the same could be said about the rest of the world.

What we appear to be seeing is a “synchronised downturn” in world economic growth.

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