We're rising out of the trough says Australia's Reserve Bank

By GREG ANSLEY

Australia's Reserve Bank is expecting growth to strengthen in New Zealand's most important trading partner, reinforcing its decision last week to leave interest rates untouched after a series of cuts in December that pushed them to a 30-year low.

In its latest monthly statement on monetary policy, the bank yesterday pointed to rising confidence at home, growing signs of international recovery, and new life in key commodity markets.

The bank also said inflation, which in December edged above its comfort zone of 2 to 3 per cent, should soon move back to the middle of the range as moderate wage cost growth was outstripped by a return to strong productivity.

It said the resilience that led to an annual growth rate of 4 per cent in the first three quarters of last year appeared to have continued into the final three months, reflected in strengthening domestic demand and a relatively soft landing for the housing sector.

Australia is further expected to gain from recovery abroad in leading economies and commodity markets also important to New Zealand.

Although demand had fallen in the past six months in most of Australia's export markets - limiting the scope for exporters to switch to alternative buyers - the weak Aussie dollar had helped boost the nation's terms of trade.

Now, the bank said, prospects for the world economy were improving - especially in the United States but also in Europe and a number of East Asian economies - and there were signs that the battered global information and technology sector was bouncing off the bottom of its pit.

A modest recovery was expected to emerge this year, underpinned by expansionary policies, but still subject to considerable risk from a possible sharp slump in Japan.

Commodity markets were also emerging from the trough, with the bank's February price index 42 per cent above its 1999 low in Australian dollar terms.

The bank said rural commodity prices had recovered strongly since December to about 28 per cent higher than the index lows of the late 1990s.

Beef and veal prices had lifted with stronger US demand, wool prices were rising because of very tight supplies - Australian production was at a 50-year low - and wheat prices remained high.

Household spending continued to grow at a solid pace despite a subdued labour market, underpinned by rising household wealth, moderate increases in incomes and more spending power from lower petrol prices and interest rates.

The bank said growth in the booming housing sector was expected to fade in the second half of this year, but the impact of this would be offset by a pick-up in business investment and in the non-residential construction sector.

The labour market remained weak - full-time employment was down 1.1 per cent over the year.