Economic Trends and Policies

Once again it is a pleasure to have this opportunity to speak to members of the ABE. I believe – I hope correctly – that business economists share our interest in seeking out practical policy responses to our problems. Today, I would like to offer some comments on current economic trends and their implications for policy. They will have a familiar ring to many of you. Looking back for a moment, by most measures 1994 was a very good year for the Australian economy: • despite the drought, GDP appears to have grown by 5 to 6 per cent; • employment increased by over 280,000 or 3 1 /2 per cent; • unemployment declined by 130,000, including a fall of more than 60,000 in the number of long-term unemployed; • the unemployment rate fell by 1 3 /4 percentage points to a touch under 9 per cent; • business investment at last took off, increasing by over 20 per cent in real terms; • business profits increased by around 10 per cent, and the profit share of national income continued to hover around its historical levels; and • underlying inflation remained around 2 per cent. The combination of rapid growth and low inflation was most welcome, leading as it did to a sharp reduction in unemployment. It was only possible, however, because we had considerable spare capacity to begin with. As that capacity is taken up, it is natural – and necessary – for the growth rate to slow. That is now happening. Yet, despite these trends, there appear to be popular concerns that all is not well – that we are in danger of lapsing into our old boom/bust ways, when a spurt in growth caused both inflation and the current account to career out of control. These are legitimate concerns for policy makers at this time but I believe – more than some others perhaps – they will be managed satisfactorily. That management has begun already, with interest rates being raised on three occasions late last year. Those largely pre-emptive rises have helped to settle the exuberance of consumers and home buyers which, six months ago, was threatening to bubble over. That, of course, was the purpose of the interest rate rises. To make further inroads into unemployment, we need sustained economic growth, not an inflationary 'dash'. Since the Reserve Bank of Australia Bulletin