RBA MPC Minutes Aug 7

Members noted that escalating concerns regarding the fiscal and banking problems facing the euro area had weighed on confidence in many economies, and economic activity appeared to have slowed further in Europe. At the same time, growth in the United States and parts of Asia had slowed, while in China indicators generally pointed to growth stabilising. Financial markets remained volatile and the risks emanating from Europe continued to affect the outlook.

Members were briefed that the IMF had recently released forecasts for global growth of 3.5 per cent in 2012 and 3.9 per cent in 2013, marginally lower than the forecasts released in April. The forecast for growth in Australia’s trading partners had also been revised lower, but remained almost 1 percentage point higher than the forecast for global growth, reflecting the larger share of trade with emerging market economies in Asia. The IMF continued to see the balance of risks to the global economy as skewed to the downside.

Members observed that there were signs that growth in the Chinese economy appeared to be stabilising at a more sustainable pace. Real GDP grew by 1.8 per cent in the June quarter, slightly faster than the March quarter, to be 7.6 per cent higher over the year. Earlier tight monetary conditions, property market restrictions and a normalisation of fiscal policies had led to a slowing in Chinese domestic demand. While total exports had continued to grow, exports to Europe had been weaker. Nevertheless, there were signs that investment growth had steadied and some early indications that conditions in the housing market had also improved a little in recent months. Meanwhile, real household consumption growth had remained broadly stable over the past few years.

In contrast to China, conditions were weaker in the rest of east Asia, with industrial production and exports broadly flat over the past year. Members noted that, with growth in demand having slowed in much of the region, inflationary pressures had eased across Asia. The Chinese authorities had adjusted monetary conditions to a more accommodative stance; there was scope for easier policies elsewhere and some countries had started down that path.

Growth in the United States slowed a little in the June quarter, and measures of household and business confidence remained at low levels in July. Employment and consumption growth had been slower in recent months than earlier in the year, and growth in business investment remained subdued. In contrast, the outlook for construction appeared to be marginally better, with activity and prices in the housing market starting to recover, albeit from very low levels. Nonetheless, members recognised that there remained large overhangs of household debt and properties for sale or in foreclosure in the housing market.

In Europe, timely indicators suggested that economic activity had contracted in the June quarter, with declines in both consumption and investment. Labour markets remained very weak, particularly in the crisis economies, where unemployment had risen further from already high rates. Measures of confidence had weakened further across most euro area economies recently. While the competitiveness of the crisis economies had been improving, members noted that further significant economic adjustment seemed necessary and the challenges ahead for the euro area remained substantial.

Commodity price movements had been mixed over the past month. Spot prices for iron ore and coking coal had declined recently, consistent with a softening in global demand and rising supply. However, prices for oil and some rural commodities had increased over the past month because of supply disruptions, with drought in the US and Black Sea cropping regions affecting the supply of grains in particular. In the June quarter, the terms of trade were estimated to have declined, though they remained at a high level.

Reserve Bank Of Australia

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