Resources Boom Could Damage Consumers, Borrowers

Much of the increase in the Aussie dollar is due to the anticipation of an interest rate rise at the next Reserve Bank of Australia board meeting in May. The only thing that seems likely to push the dollar back down is if the market suddenly considers that the RBA will not increase rates in the next few months. At the moment that seems unlikely.

In fact, with the way that the economy is performing and the increasingly heavy pressure put on inflation, more than one rate rise can be expected this year. If that happens and given the supposedly tight labour market, we could also see the potential for a wages breakout as well.

The decreased power of trade unions and their collective bargaining activity means that the potential for pay increases at levels significantly above the inflation rate are kept to a minimum. However, if the labour market is as illiquid as has been claimed then the pressure on employers to offer higher wages to retain staff, and higher wages to entice staff could have an equal impact on the economy.

We won’t say that we have reached “crisis” proportions yet – there seem to be enough crises doing the rounds, eg. “Ice” crisis, health crisis, etc, without our adding to mix. Even though most of what the media calls a crisis is far from it.

All we will say is that the commodity boom can only help the economy so far. Paul Keating made his famous “Banana Republic” statement twenty years ago, but it wasn’t in relation to commodities. There is nothing to say that the commodity boom cannot continue while the Australian consumer and borrower become seriously disadvantaged by spiralling inflation and interest rates. You only have to look at many of the resource rich African economies that are basket cases despite having billions of dollars worth of raw minerals.

Now THAT is what we call a POTENTIAL crisis.

Kris Sayce
Markets and Money

Kris Sayce

Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005.
He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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