Inflation fight in Sydney is good news for world

It’s hard to decide who has a more taxing job these days: Glenn Stevens or Kevin Rudd?

Stevens runs the Reserve Bank of Australia (RBA); Rudd is prime minister of the Asia-Pacific region’s fifth-biggest economy. The challenge facing both is the fastest inflation since 1991, and Stevens has been busily working to contain the threat. In March he raised borrowing costs to the highest in 12 years.

The onus is now on Rudd, who unveils his first budget tomorrow.

Rudd is a Labor prime minister, and that, historically, would mean opening the fiscal floodgates now that global growth is slowing. Yet, he is not only likely to turn in the nation’s 10th budget surplus in 11 years—he’s also on the spot to rein in spending. Rudd doesn’t have much choice and, perversely, it’s good news for both the Australian and global economies.

Australia’s inflation plight is focusing attention on perhaps the biggest challenge facing a nation enjoying a 17-year expansion: productivity. It’s the key to keeping things under control and allowing more of the nation’s 21 million people to benefit from growth.

One hears much about the “NAIRU” here in Sydney. The “nonaccelerating inflation rate of unemployment” got lots of attention in the United States during the mid- to late 1990s. With the commodity boom driving growth, reducing unemployment and pumping up wages, the RBA has been acting to restrain prices. The trouble is, the central bank needs help dealing with the phenomenon.

Productivity increases

That leaves productivity. Australia is uniquely positioned to benefit from the rise of China, India and other upstarts, both geographically and in terms of its mix of natural resources. It may have too much of a good thing on its hands. Steady demand from China is ameliorating the effects of higher interest rates.

Stevens has dropped not-so-subtle hints that the government must do more to ensure that rising wages aren’t inflationary. That means investing more in skills, training and capacity.

It’s vital that Australia avoid what economists call “resource distraction.” The reference here is to the temptation to get so preoccupied counting the money coming in from the resource sector that you neglect investing in service industries, technology and promoting greater entrepreneurship.

“We have to realize that China and India will never happen again and plan ahead,” says Saul Eslake, chief economist at Australia and New Zealand Banking Group Ltd.

Fresh look

Developing nations tend to have enormous appetites for commodities early on, but demand levels off over time. Once China and India begin importing fewer resources, the next round of developing nations won’t be able to fill the void for Australia.

You can tell a lot about leaders from their debut budget. This will be the first time in more than a decade that fiscal priorities come from someone other than former Prime Minister John Howard and his treasurer Peter Costello. There’s hope for a fresh look at spending by Rudd and Treasurer Wayne Swan.

“After a dozen straight budgets from a single long-lived government, there, no doubt, is much room for a ‘new broom that sweeps clean,’” says Rory Robertson, an interest-rate strategist at Macquarie Group Ltd.

The point isn’t to take away tax cuts extended to working families in recent years. It’s about investing in tomorrow. Along with boosting productivity, that means shifting spending to power grids, roads, bridges and other vital infrastructure, says Bill Evans, chief economist at Westpac Banking Corp. The benefit over time is greater economic efficiency and lower inflation, he says.

The global economy can also take heart in Australia’s focus on inflation.

Weathervane country

Many economists consider Australia a weathervane of sorts. Thanks to it being a very open and a reasonably small economy that straddles the East and West, Australia’s performance can be a harbinger of global events. It’s concerned more about inflation than other risks 10 months after global credit markets tightened up—an indication the worst may be over.

Just two months ago, traders buzzed about whether central banks might need to take steps to help stabilize markets along with the Federal Reserve. While there weren’t big predictions for Australian rate cuts, one couldn’t rule them out. Today the question is back to whether the RBA will raise interest rates.

Australia is borrowing costs. Still, the RBA, which has tightened 12 times since May 2002, is expected to keep its benchmark rate at 7.25 percent for the rest of the year. hardly without its risks. The central bank last week raised its inflation forecast and said growth will slow as consumers reduce spending amid record gasoline prices and higher

The catch is that the government needs to do its part to trim spending to curtail inflation. It’s a good problem to have relative to the gloom elsewhere in the world. And it may just mean a repeat of the 1930s isn’t on tap for the global economy.

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William Pesek: Inflation fight in Sydney is good news for world

It’s hard to decide who has a more taxing job these days: Glenn Stevens or Kevin Rudd?

Stevens runs the Reserve Bank of Australia (RBA); Rudd is prime minister of the Asia-Pacific region’s fifth-biggest economy. The challenge facing both is the fastest inflation since 1991, and Stevens has been busily working to contain the threat. In March he raised borrowing costs to the highest in 12 years.