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Financial Happenings Blog
Tuesday, December 04 2007

The Australian Bureau of Statistics has today released the latest gross domestic product figures for the Australian Economy.  My previous experiences teaching Economics in Jakarta encouraged me to keep a close eye on economic statistics and their likely impact according to economic theory.  However, macro economic data such as the GDP figures also provide some practical insights into the economic climate for investors.  So what might the latest figures be telling us?

On the up side, the 4.3% growth rate in the Australian economy  provides news that the economic climate for businesses has continued to be strong over the past year.  This figure is significantly higher than the 3% to 3.25% experienced over history.  These results would suggest that Australian companies have been performing strongly over the period as evidenced by mostly strong profit results.  However the story is not all rosey.

On the down side, such a strong figure shows there is strong demand for goods and services in the economy.  This translates into strong demand for inputs into the production process - particularly materials and employment.  This has been backed up by Australia's strong unemployment data.  Unfortunately, this demand puts pressure on costs for businesses which in turn are passed on as higher prices to consumers leading to increased inflation (or lower profits).  We all are well aware that growing inflation leads to pressure on the RBA to raise interest rates the purpose of which is to reduce some of the demand in the economy.  This in turn slows down business growth which should result in less strong growth in share prices.

This is a very simple synopsis but hopefulyy highlights that strong economic growth is not always good news.  So what is a solution to the strong growth dilemma?  Economic theory would suggest that for an economy to sustain stronger levels of economic growth it has to be through increased levels of productivity in the economy not simply increased demand.  It will be interesting to see whether productivity growth can be achieved in the life of the next federal government.

Scott Keefer

Posted by: Scott Keefer AT 07:49 pm   |  Permalink   |  Email
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