The global economy grew faster than trend over the year to mid 2010. Global growth will probably ease back to about trend pace over the coming year as strong recoveries in the emerging world give way to a more sustainable pace of expansion and growth remains subdued in the United States and Europe. At the same time, concerns about the possibility of a larger than expected slowing in Chinese growth have lessened recently and most commodity prices have firmed, after a fall earlier in the year. The prices most important to Australia remain at very high levels, with the result that the terms of trade are at their highest since the early 1950s. The turmoil in financial markets earlier in the year has abated, though sentiment remains fragile.

Information on the Australian economy indicates growth around trend over the past year. Public spending was prominent in driving aggregate demand for several quarters but this impact is now lessening. While there has been a degree of caution in private spending behaviour thus far, the rise in the terms of trade, which is now boosting national income very substantially, is likely to lead to stronger private spending over the next couple of years, especially in business investment.

Asset values are not moving notably in either direction, and overall credit growth remains quite subdued at this stage notwithstanding evidence of some greater willingness to lend. The exchange rate has risen significantly this year, reflecting the high level of commodity prices and the respective outlooks for monetary policy in Australia and the major countries. This will assist, at the margin, in containing pressure on inflation.

The demand for labour has continued to firm. While the labour market is not as tight as in 2007 and 2008, some further strengthening would appear to be in prospect, judging by the trends in job vacancies. After the significant decline last year, growth in wages has picked up somewhat, as had been expected. Some further increase is likely over the coming year.

Given these conditions, the moderation in inflation that has been under way for the past two years is probably now close to ending. Recent information suggests underlying inflation running at about 2½ per cent, with the CPI inflation rate a little higher due mainly to increases in tobacco taxes. Both results were helped somewhat in the latest quarter by unusual softness in food prices. Inflation is likely to rise over the next few years. This outlook, which is largely unchanged from the Bank’s earlier forecasts, assumes some tightening in monetary policy.

For some time, the Board has held the stance of monetary policy steady, which has resulted in interest rates to borrowers being close to their average of the past decade. This allowed some time to observe the early effects of previous policy changes and to monitor the uncertain global outlook. The Board is also cognisant of differences in the degree of economic strength by industry and by region.

However, the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains. At today’s meeting, the Board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent.

A rise of .3 per cent in retail sales in August after one of .7 per cent in July has also given retail landlords a boost before the crucial Christmas trading period.

Economists said that the latest round of lacklustre figures suggested that the economy is not as strong as many policy makers might hope and any increase in interest rates could challenge a number of industries, such as building and industrial property markets.

Property and construction consultants Davis Langdon said holding the official rate at 4.5 per cent would assist to strengthen constructing industry confidence.

The firm’s Australian and New Zealand research manager, Michael Skelton, said a pause in rate rises would support the residential sector, with building approvals for dwellings continuing to decline since February.

Given the housing shortage, this would remain a hot topic, he said.Some of the larger developers, including Stockland and Mirvac, have been warning that higher rates along with a shortage of land will dampen development within their residential divisions.”

Although the fundamentals in Australia’s property market continue to improve and the medium-term outlook is very positive, non-residential building approvals remain low and compressed builders’ margins and high costs of borrowing are impeding the viability of some projects,” Mr Skelton said.He said significant investment within the non-residential sectors was required to support the next phase of the resources boom, which is the key driver of national economic prosperity.

RP Data’s national director of research Tim Lawless said, “Default rates remain low, which suggest that Australian home owners should be able to absorb this rate rise fairly comfortably.  If we see another four or five hikes the downwards pressure on home values is likely to worsen,” Mr Lawless told The Adviser.

“For investors, the prospect of higher interest rates is not all bad.  Higher interest rates are likely to create additional demand from renters in what is already a very tight rental market.  We are already seeing the first signs of higher weekly rents and with more prospective buyers choosing to rent rather than own the upwards pressure on rents is likely to increase yields for investors further.”

The global economy grew faster than trend over the year to mid 2010, but will probably ease back to about trend pace over the coming year. Growth in China is moderating to a more sustainable rate as policies are now less accommodating. Similar adjustments to policies and growth rates are occurring in other countries in the Asian region. In Europe, output has improved significantly so far this year, but prospects for next year are probably for slower growth given planned fiscal contraction. US growth was solid in the first half of 2010 but the pace of expansion in the second half of the year is looking weaker.

Financial markets are functioning more smoothly than they were a few months ago, though caution persists, with equity prices soft and yields on sovereign bonds issued by major countries reaching unusually low levels. Commodity prices are also off their peaks, though those most important for Australia remain at very high levels, and the terms of trade have regained their peak of two years ago.

Recent information suggests that the Australian economy has been growing at around trend pace. This has been helped by high levels of public spending over the past year but private demand has also been firming. The high level of the terms of trade is boosting incomes, which will tend to add to demand over the year ahead, while the effects of earlier expansionary policy measures will be diminishing. Indications are that business investment in particular could increase strongly.

Domestic credit and asset markets present a more balanced picture than six months ago. Business credit has stabilised and while credit conditions for some sectors remain difficult, evidence is slowly emerging of more willingness to lend. Credit outstanding for housing has slowed a little over recent months, and the upward pressure on dwelling prices appears to have abated.

The demand for labour has firmed over the past year in line with improving growth. After the significant decline last year, growth in wages has picked up somewhat, as had been expected. Through to mid 2011, underlying inflation is likely to be in the top half of the target zone, while CPI inflation will probably be just above 3 per cent for a few quarters due to the impact of the tobacco tax changes.

The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. With growth in the near term likely to be close to trend, inflation close to target and with the global outlook remaining somewhat uncertain, the Board judged this setting of monetary policy to be appropriate for the time being.

The global economy grew faster than trend over the year to mid 2010. The expansion has been uneven, with the major advanced countries recording only moderate growth overall but growth in Asia and Latin America very strong. There are indications that growth in China is moderating to a more sustainable rate as policies are now less accommodating. Similar adjustments to policies and growth rates are occurring in other countries in the Asian region. In Europe, while output in some key countries has been improving significantly, prospects for next year are more uncertain given planned fiscal contraction. US growth was stronger in the first half of 2010 but the pace of labour market improvement has been slow and the expansion may be somewhat lacklustre in the second half of 2010. Overall, the Bank expects global growth to be about trend over the coming year.

The caution evident in financial markets in the past few months has abated of late, helped by the disclosure of information about European banks. Nonetheless, the global outlook remains somewhat more uncertain than a few months ago and this is reflected in the volatility of financial prices. Commodity prices are off their peaks but those most important for Australia remain at very high levels, and the terms of trade are around their peak of two years ago.

With the high level of the terms of trade expected to add to incomes and demand, output growth in Australia over the year ahead is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing. Consumption spending is recording a modest increase at present, with households displaying a degree of caution, but most indicators suggest business investment will increase over the coming year. Business credit has stabilised, though credit conditions for some sectors remain difficult. Credit outstanding for housing has continued to expand, but the upward pressure on dwelling prices appears to have abated.

The labour market has continued to firm gradually, and after the significant decline last year, growth in wages has picked up a little, as had been expected. Recent data for inflation were consistent with the Bank’s May forecasts, with underlying inflation declining to about 2¾ per cent, the lowest rate for about three years. The rate of CPI increase was a little above 3 per cent due to the effects of increases in tobacco taxes announced earlier in the year. Through to mid 2011, underlying inflation is likely to be in the top half of the target zone, while CPI inflation will probably be just above 3 per cent for a few quarters due to the impact of the tax changes and increases in utilities prices.

The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. With growth likely to be close to trend, inflation close to target and the global outlook remaining somewhat uncertain, the Board judged this setting of monetary policy to be appropriate.

The global economy has continued to expand over recent months, consistent with a trend pace of growth. The expansion remains uneven, with the major advanced countries recording only modest growth overall, but growth in Asia and Latin America, to date, very strong. There are indications that growth in China is now starting to moderate to a more sustainable rate. In Europe, while output in some key countries has been improving recently, prospects for next year are more uncertain given the budgetary constraints governments face and the pressure on euro area banks. US growth has looked stronger in the first half of 2010 but the pace of labour market improvement is slow.

Caution in financial markets has been evident in the past couple of months, driven principally by concerns about European sovereigns and banks but also by some uncertainty about the pace of future global growth. Financial prices have been more volatile and equity prices and government bond yields in major countries have declined. Some tightness in funding markets is evident, though not on the scale seen in late 2008. Commodity prices are off their peaks but those most important for Australia remain at very high levels, and the terms of trade are approaching their peak of two years ago.

With the high level of the terms of trade expected to add to incomes and demand, output growth in Australia over the year ahead is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing. Consumption spending is recording a modest increase at present, with households displaying a degree of caution, but most indicators suggest business investment will increase over the coming year. Business credit appears to have stabilised, though credit conditions for some sectors remain difficult. Credit outstanding for housing has continued to expand at a solid pace, but dwelling prices are rising more slowly than earlier in the year.

The labour market has continued to firm gradually, and after the significant decline last year, growth in wages has picked up a little, as had been expected. Underlying inflation appears likely to be in the upper half of the target zone over the next year. The rate of CPI increase is likely to be a little above 3 per cent in the near term, due to the effects of increases in tobacco taxes announced earlier in the year and significant increases in prices for utilities.

The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. Pending further information about international and local conditions for demand and prices, the Board views this setting of monetary policy as appropriate.

Since the Board last met, concerns about sovereign creditworthiness in several European countries have been a focus of financial markets. Investors have generally displayed a good deal more caution. As a result, equity prices have fallen and long-term government bond rates have declined outside of the countries most affected by the sovereign concerns. The Australian dollar fell sharply as part of this adjustment. Commodity prices have also softened, though those important for Australia remain at very high levels.

European policymakers have responded by assembling a large package to provide financing for the relevant countries for a period of time, stabilise bond markets and provide liquidity. They have also committed to action to bring budget deficits down and stabilise debt over time.

The effects of these various factors on the world economy will need to remain under review. At this stage, global growth is still expected to be at about trend pace in 2010. Conditions in Europe overall have been relatively weak, and the foreshadowed budgetary tightening will probably mean that this will continue, but growth is becoming more established in North America. In Asia, growth has continued to be quite strong and may need to moderate in the year ahead.

In Australia, with the high level of the terms of trade expected to add to incomes and demand, output growth over the year ahead is likely to be about trend, even though the effects of earlier expansionary policy measures will be diminishing. Inflation appears likely to be in the upper half of the target zone over the next year.

Consistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago. Taking all the available information into account, the Board views this setting of monetary policy as appropriate for the near term.

Recently, forecasts for world GDP growth have been revised up again, and growth is expected to be at trend pace or a little above in 2010. Conditions in Europe remain quite weak, though recent data suggest growth is becoming more established in North America. In Asia, where financial sectors are not impaired, growth has continued to be strong, contributing to pressure on prices for raw materials. The authorities in several countries outside the major industrial economies have now started to reduce the degree of stimulus to their economies.

Global financial markets are functioning much better than they were a year ago, but sovereign risk concerns have escalated significantly in Europe over recent weeks. This has prompted additional efforts by policymakers to put fiscal policies onto a sounder footing and to provide support for Greece in the near term. To date, there has been very little contagion outside Europe.

Australia’s terms of trade are rising by more than earlier expected, and this year will probably regain the peak seen in 2008. This will add to incomes and foster a build-up in investment in the resources sector. Under these conditions, output growth over the year ahead is likely to exceed that seen last year, even though the effects of earlier expansionary policy measures will be diminishing. The process of business sector deleveraging is moderating, with business credit stabilising and indications that lenders are starting to become more willing to lend to some borrowers, though credit conditions for some sectors remain difficult. Credit outstanding for housing has been expanding at a solid pace. New loan approvals for housing have moderated over recent months as interest rates have risen and the impact of large grants to first-home buyers has tailed off. Nonetheless, at this point the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase over recent months.

Recent data on inflation confirm that it has declined from its peak in 2008, helped by a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand. In both underlying and CPI terms, inflation over the most recent 12 months was around 3 per cent. Nonetheless, the extent of decline from here may not be quite as much as earlier forecast and inflation now appears likely to be in the upper half of the target zone over the coming year.

With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more. The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels. This represents a significant adjustment from the very expansionary settings reached a year ago.

The Board will continue to assess prospects for demand and inflation, and set monetary policy as needed to achieve an average inflation rate of 2–3 per cent over time.

Surfers Boulevard Beachside Apartments - Refurbished Value (from $319,900)!	Lily Rise House and Land Packages (from $399,950)!	Big Sky House & Land Packages Coomera - Selling Fast (from $428,830)!
Southport Central Residential Apartments (from $353,000)	Cassia Park Residences - Off The Plan 2011 (from $426,000)	Modena Apartments on Chevron Island (POA)
Sphere Southport Apartments - Brand New (from $375,000)	Upper Coomera Turn Key House & Land Package	FREEHOLD Over 50's Resort Victoria Towers - Off The Plan 2011!
Sentosa Waters - Surfers Paradise Riverfront Setting - Off The Plan (from $375,000)!	Cotton Beach Resort Apartments - For Sale Now (from $299,000)	Acacia Centre Apartments Penthouse - Last ONE Available ($545,000 neg)!

Speaking at a business forum in Toowoomba last week, RBA governor Glenn Stevens said with the economy growing close to trend, and inflation close to target, interest rates are now falling back to normal levels.

“The Reserve Bank has moved early to raise the cash rate to levels that deliver interest rates for borrowers and depositors more like those that have been the average experience over the past 10 to 12 years,” Mr Stevens said.

“Those interest rates are now pretty close to that average.”

18 months ago, the RBA board moved quickly to establish an “emergency low” level of interest rates in the face of a serious threat to economic activity.

According to Mr Stevens, the central bank’s “aggressive” reduction in interest rates needed to be complemented by timely movement to raise rates back to normal levels once the emergency had passed.

Moving forward, Mr Stevens said the board’s focus will be on doing its part to achieve an average inflation target of about two to three per cent.

“Our task… is now to manage a new economic upswing. This will be just as challenging, in its own way, as managing the downturn. But it’s a challenge plenty of other countries would like to have,” he said.

The global economy is growing, and world GDP is expected to rise at close to trend pace in 2010 and 2011. The expansion is still hesitant in the major countries, due to the continuing legacy of the financial crisis, resulting in ongoing excess capacity. In Asia, where financial sectors are not impaired, growth has continued to be quite strong, contributing to pressure on prices for raw materials. The authorities in several countries outside the major industrial economies have now started to reduce the degree of stimulus to their economies.

Global financial markets are functioning much better than they were a year ago and the extraordinary support from governments and central banks is gradually being wound back. Credit conditions remain difficult in some major countries as banks continue to face loan losses associated with the period of economic weakness. The concerns regarding some sovereigns appear to have been contained at this stage.

Australia’s terms of trade are rising, adding to incomes and fostering a build-up in investment in the resources sector. Under these conditions, output growth over the year ahead is likely to exceed that seen last year, even though the effects of earlier expansionary policy measures will be diminishing. The rate of unemployment appears to have peaked at a much lower level than earlier expected. The process of business sector de-leveraging is moderating, with the pace of the decline in business credit lessening and indications that lenders are starting to become more willing to lend to some borrowers. Credit for housing has been expanding at a solid pace. New loan approvals for housing have moderated over recent months as interest rates have risen and the impact of large grants to first-home buyers has tailed off. Nonetheless, at this point the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase in the early part of 2010.

Inflation has, as expected, declined in underlying terms from its peak in 2008, helped by a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand. CPI inflation has risen somewhat recently as temporary factors that had been holding it to quite low rates are now abating. Inflation is expected to be consistent with the target in 2010.

With the risk of serious economic contraction in Australia having passed some time ago, the Board has been lessening the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. Lenders have generally raised rates a little more than the cash rate.

Interest rates to most borrowers nonetheless have been somewhat lower than average. The Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process.

The results were like looking at the school report of a troubled teenager: “Much improved. Could do better. Would help if the student did some homework once in a while.”

Even if you slept through economics at school, you now have the chance to do a free refresher course. In the next 18 months we’ll all be going through a (real world) economics exam – get it wrong and the ramifications will be much worse than a scolding from your mum.

See below to take the test yourself

Questions:
1. After four years of reading the Barefoot Investor column and listening to me bang on about the dangers of debt, you finally decide to do something about it. The quickest way to achieve this is:

(a) By negotiating a lower rate on your debts, and increasing your repayments.

(b) By getting a line of credit – set up by a friendly telemarketer who called while you were watching Today Tonight.

(c) By cutting up your credit cards.

2. On reaching university you take up a student banking package that includes a credit card with a small, manageable limit. As long as you’re responsible and pay it off each month, will this aid in establishing a positive credit record down the track?

(a) Yes.

(b) No.

3. You see an ad in the paper for a home loan offering an attractive rate of 9 per cent. Next to the figure is the “comparison rate” of 9.75 per cent. The comparison rate means:

(a) The average rate of comparable home loans currently on offer in the market.

(b) The true interest rate you’ll pay after the ongoing and establishment fees are factored in.

(c) The interest rate you’ll pay if you choose to fix your rate.

4. The unthinkable happens and your bank goes belly up. Is the money in your account insured against loss?

(a) Yes.

(b) No.

5. The Reserve Bank has just lowered official interest rates by 1 per cent. This was designed to:

(a) Make sure property continues to double in value every seven years.

(b) Make sure the banks remain profitable.

(c) Stimulate the economy in light of the global economic slowdown.

6. You slap on the gold watch, sandals and socks, and point the Commodore to the Gold Coast. The $300,000 you’ve accumulated in superannuation will provide you with roughly how much income per year in retirement?

(a) $34,000.

(b) $24,000.

(c) $18,000.

7. As an investor there are only two things within your control that ultimately determine the bulk of your investment returns. They are:

(a) The asset class you choose to invest in, and the fees you pay.

(b) The fund manager you choose, and their track record.

(c) The movement of the share market, and your trading strategy.

8. You decide to set up a nest egg (earning 8.5 per cent) for your soon-to-be-born baby, kicking it off with $5000 and regularly investing $100 a month. After 18 years you’ve contributed $26,600, but what’s the total value of your investment?

(a) $73,700.

(b) $51,820.

(c) $37,850.

9. You buy a gas-guzzling six-cylinder Ford Falcon so you can tailgate Toyota Prius owners in suburban shopping centres. Taking everything into account (financing, depreciation, servicing, rego, insurance, fuel, tyres), how much does it cost a week to run?

(a) $175.95.

(b) $242.47.

(c) $309.45.

10. Your father tells you he bought his first car for about the same money you dropped on a three-day bender in Adelaide. With inflation driving prices up around 3 per cent a year, how long will it take for prices to double?

(a) 12 years.

(b) 14 years.

(c) 24 years.

11. You’re adviser calls and suggests you need to diversify, given that your share portfolio consists of Adultshop.com (last trade $0.008) and Amazing Loans (currently suspended for failing to lodge their accounts). To be a fully diversified investor you’ll need to:

(a) Invest in shares from a range of industries and sectors.

(b) Invest in both local and international shares.

(c) Invest across a range of different assets.

12. Your brother Phil, a nail beautician by trade, tells you about a hot investment tip he overheard at the salon. After you do some research, you see that it’s advertised as having a return well above market rate, and no risk. You decide to:

(a) Invest lightly and see how it goes.

(b) Consider it too good to be true and not invest.

(c) Invest heavily and maximise your return.

Answers
1 A. If anyone calls you while you’re watching Anna Coren, hang up on them.

2 B. Don’t fall for that old bankers’ tale.

3 B. But remember: while comparison rates are helpful, they don’t include the exit fees the banks hit you with.

4 B. But political pressure may change this.

5 C. And economists are predicting we may see some more stimulation this year.

6 B. Home brand dogfood will do.

7 A. Mention this to the next financial salesperson who tries to pitch you.

8 A. Teaching your child first hand the power of compound interest is probably the best thing you can do for them.

9 B. The Prius will give you better fuel economy – just don’t expect to drag anyone off at the lights.

10 C. Just use the “rule of 72″; 72 divided by 3 (the interest rate) gives you 24 years. This works for any financial calculation.

11 C. Warren Buffett says diversification if for wimps. But he’s smarter than you (and me), so play it safe and spread your eggs.

12 B. The ANZ survey asked a similar question and found that over half of respondents were prepared to risk their cash. Perhaps that explains why the ABS found that Australians lost nearly $1 billion last year to frauds and scams (although at that rate we’re still $729 billion ahead of the Wizards of Wall Street).

How did you go?
(0-3) Congratulations! You’ve won an all-expenses-paid holiday to the Gold Coast, where you’ll be among a select few investors to learn about an exciting investment strategy called Time Share Accommodation.

(4-6) I’m not going to beat around the bush – your score ranks you below average. The only people in finance who get away with being consistently below average are fund managers. They trouser billions a year in fees that come from the retirement balances of people like you.

(6-9) Solid performance. One suggestion: if you’re into retail managed funds, take a look at Australian Foundation Investment Company (ASX: AFI) and Argo Investments (ASX: ARG), noting their historical returns and the fees they charge (see question 7).

(9-12) Hey I’m impressed – you scored a higher mark than me when I did a second read through of the questions!

Tread your own path!