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Tuesday, 19 August 1980
Page: 68

Introduction

Any broad assessment of economic developments needs to pay attention to a wide range of information. While the national accounts estimates are based on a large amount of source data and are presented within a coherent framework, the estimates have exhibited considerable variability due to revisions and, on occasions, movements in individual items have appeared inconsistent with each other or with other sources of information. This places limits on their usefulness and means that judgment and other available information must be used when arriving at an overall view on how economic developments are unfolding. Last year's Statement No. 2 highlighted some of these difficulties and the latest national accounts estimates suggest that the estimates continue to be surrounded by uncertainty.

One indicator of the internal consistency of the national accounts estimates is the behaviour of the 'statistical discrepancy'. Product can be estimated either from expenditure data or income data; the difference between the two estimates is the statistical discrepancy. In Australia, the income-based estimate of GDP has traditionally been used as the basic measure of product growth, with the statistical discrepancy being assigned to the expenditure side of the accounts. A large statistical discrepancy indicates that the measurement of either the expenditure or income estimates is inadequate. Similarly, a significant trend in the discrepancy suggests that the estimates of the growth of individual items are out of line with actual developments; this could of course be associated with improved accuracy in the measurement of the level of individual aggregates.

Table 1 sets out the recent history of the statistical discrepancy and the two measures of product growth. Since 1973-74 the statistical discrepancy has been on a general downward trend and in 1978-79 it became negative for the first time since 1970-71. In 1979-80 it became even more negative. In short, product as measured by the expenditure estimates has been increasing at a faster rate than the published income-based estimates.

A variety of possible reasons can be brought forward to explain this difference in growth. For example, income estimates in the early to mid 1970s could have been inflated because of rising capital gains, fed by accelerating inflation, being classified as income. More recently, a growing cash economy might be better reflected in the expenditure estimates than in the income estimates. On the other hand, the Statistician has referred to the illegal economy as a source of understatement of expenditure.

The divergence between the civilian employees series and the labour force employment estimates (which have grown the faster over the past year - see page 18) and the subsequent withdrawal from publication of the civilian employees series has introduced a new element of uncertainty into the accounts. The Statistician has revised upwards his estimates of wages, salaries and supplements. These estimates have traditionally been based on the civilian employees series. The Statistician is reviewing the employment statistics and the outcome may have implications for the product estimates and for the pattern in the statistical discrepancy.

While further revisions to employment may bring the movements in the expenditure and income side of the accounts closer together for 1979-80, they would not remove the general pattern in the statistical discrepancy over the longer run of years and they would introduce a sharper movement in the discrepancy between 1977-78 and 1978-79. Notwithstanding the difficulties in compiling national accounts, which are not unique to Australia, these estimates continue to be a useful tool and are given due regard in what follows.

Table 1 - Expenditure and Income Based Estimates of GBP (Constant 1974-75 prices)

Statistical discrepancy

Demand and Output

Domestic economic activity and employment strengthened significantly over the course of 1979-80. The main contributions in the first half of the year came from very strong export growth and a sizeable build-up in non-farm stocks; private final domestic demand was subdued in this period, with strong growth in private dwelling investment and moderate growth in private consumption being largely offset by a decline in business fixed investment. The second half of the year brought an acceleration in private consumption expenditure and a recovery in business fixed investment, accompanied by a run-down in stocks and some easing in export growth. Growth in non-farm domestic product for the year as a whole was more than 3 per cent - about what was expected at Budget-time last year. As had also been expected, farm product declined from the peak recorded in 1978-79 but was still high. Employment expanded more rapidly than in any year since 1973-74.

All in all, 1979-80 saw significant gains in the recovery process. Despite these gains, the factors that have been constricting the economy's growth potential in recent years still remain. Some new problems also are emerging; these problems are addressed in Part II.

The following paragraphs describe major developments in the past year or so. National accounts estimates provide the framework for the discussion but where appropriate they are supplemented by other information. The commentary, including the accompanying charts, refers to annual and half-yearly movements. Unless otherwise noted, all figures mentioned are in constant price ('real') terms and (apart from full-year changes) are seasonally adjusted. Since the 'rear and money' economies are part and parcel of each other, the use of developments in 'real' expenditures as the starting-point for discussion is, though conventional, to some extent arbitrary.

Private final consumption expenditure(Chart 1, panel a) increased by 2.3 per cent in 1979-80, much as expected at this time last year and not significantly different from the average growth rate over the previous three years. Growth increased in the second half of the year to an annual rate of 2.9 per cent. The removal of the income tax surcharge from 1 December 1979 doubtless contributed to this increase; so too did the significant lift in employment growth that occurred towards the end of 1979.

Chart 1 - Growth in Components of Expenditure on Gross Domestic Product (S million, constant 1974-75 prices, seasonally adjusted)

400 200

1977-78 1978-79 I II I II

(a)   Private consumption

1979-80 I II

-I00J

200 -100

100

(b)   Private Investment in Dwellings

-100 ->

(c)   Private Investment in Other Building and Construction

200

-200

(d)   Private Investment in Plant and Equipment

Wl_

800 :

600 :

400 : 200

(e)   Total Private Final Demand

-100

400 200

(/) Government

100

600 400 200 A

(g)   Exports

-200 -400 :

BP

(A)   Total Final Expenditure e = a + b + c h = e + f + B k = h + i - j + d 1977-78 1978-79 I II I II (0 Increase in Stocks

11

1979-80

I If

(J)   Imports

M

(k)   Gross Domestic Product

(A)   Two estimates are shown for the growth of GDP. The shaded bar is the published (income-based) estimate. The unshaded bar is an expenditure-based estimate (equal to (k) in the above identity which excludes the change in the statistical discrepancy). (/) The gross non-farm product estimate is income-based (includes discrepancy).

Legend

I Positive contribution |to product growth j Negative contribution Ito product growth

Estimated developments in disposable income, consumption and the saving ratio in recent years are set out in Table 2. Real household disposable income rose marginally in 1979-80 and the saving ratio resumed a downward movement after rising in 1978-79 as a result of the surge in farm incomes in that year. There was also a further decline in the 'non-farm' saving ratio in 1979-80. The falls in 1979-80 notwithstanding, both the total and 'non-farm' saving ratios remain above their levels of earlier years and there is still scope for consumption to grow more strongly than real disposable income.

Table 2 - Earnings, Income andj Consumption (Per cent)

(a)   National accounts basis. Non-farm wages, salaries and supplements per unit of non-farm wage and salary earner employment (6) Deflated by implicit price deflator of private final consumption expenditure.

(c)   Ratio of household saving to household disposable income. (The latter is defined in the national accounts on a tax-paid basis.) Seasonally adjusted quarterly estimates of the saving ratio are included regularly in the Treasury publication Round-up of Economic Statistics.

(d)   Derived from the ratio of private consumption to household disposable income less income of farm unincorporated - enterprises plus income tax paid by other individuals. While providing only an approximation to the 'non-farm' saving ratio, these derived figures should be a reasonable indication of movsments in the saving ratio abstracting from the farm sector.

(e)   Seasonally adjusted and at annual rate.

Private dwelling investment(Chart 1, panel b), which had begun to rise in the second half of 1978-79 following two years of steady decline, increased strongly in 1979-80 to record a rise of 10.5 per cent for the year as a whole. The improved level of activity in the dwelling sector was assisted by a return to more normal levels of stocks of unsold new dwellings and the improved price competitiveness of new dwellings relative to established ones. An upsurge in building in Sydney and in Queensland resort areas appears to have reflected some speculative elements. Although the rate of increase of housing finance approvals for owner occupation eased considerably in the first half of 1979-80, activity continued to respond to the rapid increase in loan approvals in 1978-79 and the growing interest of developers and investors in providing townhouses and flats in some areas. For example, while commencements of houses were 9.2 per cent higher in the first three quarters of 1979-80 than for the same period a year earlier, commencements of dwellings other than houses (home units, etc) rose by no less than 32.1 per cent between the same two periods.

Private business gross fixed capital expenditure(Chart 1, panels c and d) declined by 5.2 per cent in 1979-80 after increasing by 9.3 per cent in 1978-79. Non-residential building and construction and private investment in plant and equipment both declined in the first half but non-residential building and construction rebounded strongly in the second half; there was a small further decline in investment in plant and equipment in the second half. The completion of the phasing down of the investment allowance from 40 per cent to 20 per cent at the end of 1978-79 was no doubt the major influence on the decline in the first six months and in the year as a whole. The strong second half increase for nonresidential building and construction - at a seasonally adjusted annual rate of 23 per cent - is compatible with earlier information from the Statistician's investment expectations survey. The small fall for plant and equipment investment, however, implies that the strong growth in that area expected for the June quarter did not materialise. Unexpected delays, possibly associated with industrial disputation, skilled labour shortages, or the temporary deferment of some investment pending greater clarification of the overseas outlook, may have been responsible for that lower than expected outcome.

While there are reasons to be cautious, the strong growth in non-residential building and construction in the second half of 1979-80, together with the very strong growth in 1980-81 for private business fixed investment foreshadowed by the Statistician's investment expectations survey (see page 56), point to the basic strength of the investment recovery now under way. As Table 3 shows, however, investment as a proportion of GDP still remains below past averages.

Table 3 - Private Business Gross Fixed Capital Expenditure as a Percentage of GBP

Year-

Average 1960-61 to 1972-73 . 12.2

1973- 74...... 10.1

1974- 75...... 9.9

1975- 76...... 9.7

1976- 77...... 9.3

1977- 78...... 9.7

1978- 79...... 10.3

1979- 80...... 9.7

Half-year(a)-

1979-80 I...... 9.7

II...... 9.8

(a)   Seasonally adjusted.

The expenditure categories discussed so far - private final consumption and private gross fixed capital expenditure - make up private domestic final expenditure (Chart 1, panel e). As shown in Table 4, private domestic final expenditure made a smaller percentage points contribution to GDP growth in 1979-80 than in the previous year, largely because of the decline in business investment in the first half of the year.

Table 4 - Contributions to Change in Gross Domestic Product (Constant 1974-75 prices)

Total public Private sector domestic final final Statistical Non- expen- expen- Net dis- farm Farm diture diture Stocks Exports Imports exports crepancy GDP GDP GDP

Percentage change on

Percentage points contribution to change in GDP previous period

Year-

(a)   Seasonally adjusted.

Government final expenditure(national accounts basis, all governments - Chart 1, panel f), is estimated to have increased by 0.8 per cent in 1979-80, the growth accruing principally in the second half of the year. As was the case in 1978-79, this growth was more than accounted for by an increase in current expenditure (2.5 per cent); capital expenditure fell by 2.9 per cent. The direct contribution of government final expenditure to product growth in 1979-80, at 0.2 percentage points, was one of the smallest in the post-war period. There was a further small fall in the ratio of public sector spending on goods and services to GDP although it remained considerably above pre 1974-75 levels (see Chart 2). As was indicated in last year's Statement, that higher level of the ratio is wholly attributable to expenditure by the State and local government sectors. The figures illustrated in Chart 2 do not, of course, tell the whole budgetary story; in particular, transfer payments - which loom very large in Commonwealth outlays - are not included. (For further discussion of the public sector, see pages 29 and 30 below and Statement No. 6.)

Growth in export volume (Chart 1, panel g), although decelerating during the year, was very strong in both halves of 1979-80, making a substantial contribution to the increase in total final expenditure (Chart 1, panel h) and product growth (Table 3). The continuing strength of export volume was largely attributable to increased rural shipments, including a doubling in wheat exports. Nonferrous metal and other manufactured exports also increased significantly. For 1979-80 as a whole, exports of goods and services are estimated to have risen by 14.6 per cent.

Importvolume (Chart 1, panel j) fell slightly (by 1.1 per cent) in 1979-80 reflecting a reduction in deliveries of defence equipment and capital goods. Imports of goods and services fell at an annual rate of 6.2 per cent in the first half of the year but then increased at an annual rate of 6.6 per cent in the second half.

Chart 2 - Share of Public Expenditure in Gross Domestic Product(o)

Total

State and Local Government

Commonwealth Government

Average ] 972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1966-67 to

1972-73

(a)   The ratio of Government expenditure on final goods and services to gross domestic product at market prices. Seasonally adjusted quarterly estimates of the total Government ratio are published in the Treasury publication Round-up of Economic Statistics.

With imports easing slightly and exports expanding strongly, net exports made a significant contribution to product growth in 1979-80 (Table 4), mainly in the first half of the year. Export and import performances in 1979-80 are discussed further in the section on the balance of payments.

Stockmovements in recent years are shown in Chart 1 (panel i). In the first half of 1979-80 a run-down in farm stocks associated with the shipment of 1978-79's record rural output was more than offset by an accumulation of nonfarm stocks. Part of the build-up in non-farm stocks (in particular the build-up of motor vehicle stocks) would have been unintended, but there also appears to have been a precautionary accumulation of petroleum-related stocks. In the second half of the year non-farm stocks were run down as the unintended stock rises of the previous half-year were worked off. The effect of industrial disputes on output, particularly in the coal industry, also contributed to stock decumulation. Farm stocks continued to fall in the second half of the year. For the year as a whole, non-farm stocks increased but, because of the fall in farm stocks, overall stock movements detracted importantly from product growth (Table 4).

Farm productdeclined by 9.0 per cent in 1979-80 but was still seme 17.9 per cent above the average level for the three years to 1977-78.

Increased plantings, together with generally favourable seasonal conditions, led to above-average cereal crops, notably of wheat (where output was the second highest on record) and barley. There was a sizeable fall in meat production. Wool production was 2 per cent higher than in the previous year.

Growth in non-farm product in 1979-80, at 3.1 per cent, was above the rates recorded in the previous two years. With the sizeable fall in farm product, growth in total domestic product in 1979-80 is estimated to have been 2.2 per cent.

Labour Market

There was a clear improvement in labour market conditions in 1979-80. According to labour force survey estimates, average total employment increased by about 144 000 or 2.4 per cent in 1979-80, a faster growth rate than in any year since 1973-74. Between the June quarters of 1979 and 1980 - that is, over the course of 1979-80 - total employment grew even faster, by 2.8 per cent. Even with a growing labour force, including a small increase in the workforce partici pation rate, there was a small decline in the average level of unemployment in 1979-80, the first such decline for six years. Table 5 shows the major labour market indicators for recent years.

Employment^) Unemployment^)

(a)   Labour force survey basis. Total employment also includes some other minor categories.

(b)   Differences between the ABS and CES series are discussed in the October 1976 issue of the Treasury publication Round-up of Economic Statistics.

(c)   Annual data are based on February, May, August and November observations.

(d)   Not applicable.

(e)   Prior to 1976-77 relevant figures are not available.

The labour force survey indicates that the increase in employment in 1979-80 was fairly evenly spread between the 'employers and self-employed' category, which rose by 2.6 per cent, and wage and salary earner employment, which rose by 2.4 per cent. Employment derived from the payroll tax based civilian employees series recorded a rise of only 1.0 per cent over the course of the year to April 1980 (after which publication of this series was withheld). This stands in marked contrast to the estimated growth in wage and salary earner employment according to the survey. While there are reasons to question the reliability of both series - the survey because of inherent problems of sampling variability and the civilian employees statistics because the payroll tax data on which the private sector estimates are based provide only a partial coverage of civilian employment - the survey based employment series appears to provide a better guide to recent employment trends than the payroll tax based estimates.

In making such a judgment, it is important to note that the labour force survey estimates suggest growth over the previous twelve-month period of 2.0 per cent or more for each of the last ten months of the year - which reduces the chance that this faster rate of increase was due solely to sampling errors.

Because of the widening divergence in the growth rates of the two employment series, the Statistician is investigating the payroll tax based series and has withheld publication of the series until revised figures are available. He is also investigating the methods and procedures of the monthly labour force survey.

The labour force participation rate, which had been falling persistently for some years, recorded a small increase in 1979-80 (Table 5). The rise was more pronounced over the course of the year, from 60.7 per cent in the June quarter of 1979 to 61.3 per cent in the recent June quarter. The fact that the strong growth in employment over 1979-80 was accomplished by attracting more people into the workforce rather than by reducing the number unemployed is further evidence of the basic adaptability and flexibility of the workforce as a whole, and perhaps also of the rigidities among some of those remaining unemployed. In 1979, of the people employed at some stage during the year, 23 per cent left a job. This dynamic aspect of the employed labour force is also evident in monthly flows. It would appear that each month around 4 per cent of those employed in the previous month leave employment while around 41 per cent of those who were previously not in the labour force enter employment; of those previously unemployed, around 20 per cent find employment each month.

According to the labour force survey, unemployment for both the full-time and total labour forces was below the levels of a year earlier for much of 1979-80 (Chart 3). For the year as a whole total unemployment was about 6000 persons lower on average than in the previous year, declining from 6.3 per cent of the total labour force in 1978-79 to 6.1 per cent in 1979-80 (Table 5); however, an apparent easing in the labour market towards the end of the year meant that, by the June quarter, unemployment was higher by some 7200 persons than a year earlier. With strong growth in the labour force over the year, the unemployment rate in the June quarter 1980 - 6.1 per cent of the labour force - remained slightly below the rate of a year earlier. The number of registrants with the CES also rose slightly between the June quarters of 1979 and 1980 and increased on a year-on-year basis.

Other labour market developments of interest in 1979-80 included a continued firm rise in part-time employment, a much stronger rise in female than in male employment and a pick-up in employment of juniors.

Chart 3- Total Unemployment: 1978-79 and 1979-80 (Monthly) (per cent of labour force)

50

i i i i i i i i i i i i JASONDJ FMAMJ

Prices

The downward trend in the rate of inflation that had been established from 1975-76 was interrupted in 1978-79, initially because of factors originating outside Australia. In 1979-80 most of these exogenous factors continued to put pressure on domestic price levels and, together with the indirect and flow-on effects of what had occurred in 1978-79, contributed to a further rise in the rate of inflation. There were further large increases in the international price of oil and world commodity prices generally continued to rise rapidly until around February 1980.

Table 6 gives some indication of the direct effects of these exogenous factors on the consumer price index in recent years. It shows movements in the CPI, together with movements in the CPI adjusted to exclude food and petrol prices, health service costs and the direct effects of the indirect tax changes made in the 1978-79 Budget. The acceleration in the adjusted index in 1979-80 would reflect to some extent the indirect and flow-on effects referred to above. Much of the latter would have come from wages via the indexation process, although flow-on effects from earlier petrol price rises would also have been an influence.

Table 6 - Consumer Price Index Movements: Original and AdjustedfaJ (Six capital cities, percentage change on previous period)

(a)   Consumer price index adjusted to exclude food and petrol prices, health care costs and the direct effects of the indirect tax changes made in the 1978-79 Budget.

(b)   Seasonally unadjusted annual rates.

Movements in the main price indexes in recent years and in the latest three half-years are set out in Table 7. There was some easing in most of the monthly price indexes in the latter months of 1979-80, primarily reflecting an easing in overseas commodity prices.

Year

1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80

Half-year(a)

1978-79 II

1979-80

Consumer price index -

All groups.....

Excluding food ....

Excluding hospital and medical services Implicit deflators(o) -

Private final consumption

Major GNEcomponents

Gross non-farm product Sectoral indexes -

Manufacturing industry -

Foreign trade - Implicit deflators(6) -

Exports of goods and services .

Imports of goods and services . Export price index(e) .... Imported materials used in manufacturing

19.8 11.5 19.4 20.8

16.7 28.3 13.1 42.8

7.5 11.1

9.0 11.8

11.3 15.8 11.9 14.9

4.2 13.3 4.9 10.2

15.5 9.5

12.5 7.3

14.2 18.1 (c)22.2 (c)32.2

18.2 12.7 25.8 18.3

13.1 22.2 20.4 40.5

13.4 15.1 (rf)20.4 (a")34.5

(a)   Annual rate. (Z>) Half-yearly data are seasonally adjusted, (c) Increase in twelve months to May. (

(e)   Percentage changes for 1975-76 and later years are based on the revised Export Price Index (reference base 1974-75=100) released by the Statistician on 12 October 1979 and are not strictly comparable with those appearing for earlier years. The revised index differs from the earlier index (reference base 1959-60= 100) in respect of its weighting pattern and coverage of exports.

Incomes

Wages and earnings accelerated in 1979-80 (see Table 8). Average weekly earnings (male unit basis) increased by 9.6 per cent for the year as a whole, compared with 7.7 per cent in 1978-79; the increase over the course of the year was considerably larger at 11.8 per cent.

Table 8- Elements in Earnings Growth

Average

(a)   The difference between the increases in awards and earnings over any period is commonly used as a measure of earnings drift. However, different rates of increase can also reflect timing and coverage discrepancies between the two series.

(A)   Quarterly figures are from seasonally adjusted data.

(c)   The difference between the increase in total (i.e. per employed male unit) and ordinary time average weekly earnings over any period reflects differences in the coverage of the two series as well as variations in average overtime hours. {d) Includes about 0.5 percentage points for incorporation of some over-award payments into the Metal

Industry Award as supplementary payments, (e) Annual increase from year to May 1979 to year to May 1980. (/) Three months to May 1980.

The recent rise in the absolute contribution of national wage case decisions to the rate of increase in awards is the result of applying a high degree of indexation to an accelerating CPI. The most recent decision (14 July) has continued this trend; the latest two national wage increases compound to 8.9 per cent, the largest increase for any twelve-month period since 1977. 1979-80 also saw the most significant movement for some years in awards outside national wage cases. In particular, a substantial proportion of wage and salary earners received work value' and other non-national wage case increases during the year. As a result of both these influences, the rate of increase in average awards rose in 1979-80.

As in 1978-79, average weekly earnings increased significantly faster than average minimum male awards. This would suggest that earnings drift and/or increased overtime have been of some significance, although conclusions can be no more than tentative at this stage because of the timing problems and limitations of the data. In particular, the award wage rate indexes do not cover a significant proportion of employees covered by the earnings series. Also those award rates of pay which are included in the indexes are, at present, weighted according to the pattern of employment prevailing in 1954. Moreover, the indexes are sometimes slow to reflect changes in award wages and latest observations are therefore subject to substantial revision.

Nevertheless, it is clear that there has been substantial drift of wages and earnings outside national wage cases since 1978. This has coincided with a steep increase in industrial disputes over wages and hours of work. In 1979, 2.2 million working days were lost directly through such disputes, compared with 1.1 million in 1978 and 0.9 million in 1977. The timing of this development in relation to labour market trends suggests that the increased demand for labour has played some causal role.

Table 9 sets out information on real award wages and earnings. The acceleration in inflation in 1979-80, as measured by the private consumption deflator, was enough to offset the acceleration in award wages and average weekly earnings (male unit basis). As a result, male award wages deflated by the private consumption deflator declined by 1.2 per cent in 1979-80 after decreasing by 2.4 per cent in the previous year. The corresponding figures for average weekly earnings were declines of 0.1 per cent and 1.2 per cent. To an extent this fall in real award wages and real average weekly earnings in 1979-80 was a reflection of the initial lags in the adjustment of wages to prices in a period of accelerating inflation.

In 1979-80 the private consumption deflator rose somewhat more quickly (by 9.7 per cent) than the non-farm product deflator (9.2 per cent), largely because of the effect of a faster rise in rural prices and a decline in the terms of trade. Adjusted by the non-farm product deflator, the fall in real awards in 1979-80 reduces to 0.8 per cent and real earnings show a slight rise.

Movements in average weekly earnings and in the consumer price index in recent years are shown in Chart 4.

Table 9- Real Wages and Earnings ($, at 1974-75 prices)

Average weekly earnings Average minimum male awards (male unit basis)

(a)   Deflated by implicit price deflator of private final consumption expenditure.

(b)   Deflated by implicit price deflator of gross non-farm product.

(c)   June figure estimated.

Chart 5 - Employment, Productivity and Product (percentage change on previous period) 4n

3 2 1

(a)

Employment

A-

2-

-1-

-2-

Productivity 4

3 2

Average 1966-67 to

1972-73

1978- 1979- 79 80

-l-»

(A)

Average 1966-67 to

1972-73

1974- 75

1976- 77

1978- 79

1979- 80

W Product

El

Average 1966-67 to

1972-73

1974- 75

1976- 77

1978- 1979- 79 80

(a)   Treasury estimate of total non-farm employment consistent with National Accounts income aggregates. (A) Treasury estimate of total non-farm employment consistent with National Accounts income aggregates, adjusted for changes in average hours worked by total employed persons.

(c)   Gross non-farm product at constant (1974-75) prices per unit of non-farm employment as defined in (a).

(d)   Gross non-farm product at constant (1974-75) prices per unit of non-farm employment as defined in (a), adjusted for average hours worked.

Table 10 shows indexes of average real labour costs, average labour productivity and real unit labour costs estimated for the non-farm sector of the economy. 1979-80 saw some further correction of the imbalances between real labour costs and productivity. The real unit labour cost index, which had reached a peak level of 110 in 1974-75 (average 1966-67 to 1972-73=100), fell to an estimated level of 105 in 1979-80.

Over the period since 1976-77 there has been a relatively small increase in average real labour costs. This development has coincided with an apparent easing in labour productivity growth and, as a consequence, there has been only a gradual reduction in real unit labour costs. Taking the national accounts statistics at face value, recorded labour productivity growth has slowed down considerably from 3.8 per cent per annum over the period 1974-75 to 1976-77, to only 1.1 per cent per annum over the period since 1976-77. Chart 5 depicts recent movements in product, employment and productivity; the productivity and employment measures are shown on both an 'hours worked' and an 'employed worker' basis.

Table 10 - Real Unit Labour Costs Estimates for the Non-farm Sector (Average 1966-67 to 1972-73 = 100)

Year-

1972- 73

1973- 74

1974- 75

1975- 76

1976- 77

1977- 78

1978- 79

1979- 80

Half-year(c) - 1979-80 I II

Average real Average labour Real unit labour cost productivity labour cost index(a) index(6) index

(1)   (2) (3 = 1 -r 2)

112 110 102

116 111 105

126 114 110

126 118 107

131 123 107

132 122 108 131 124 106

133 127 105

133 126 105

133 127 105

(a)   Non-farm wages, salaries and supplements plus total payroll tax, deflated by the implicit price deflator of gross non-farm product, per hour worked by non-farm wage and salary earners.

(b)   Gross non-farm product at average 1974-75 prices per hour worked by persons employed in the nonfarm sector.

(c)   Seasonally adjusted.

The gross operating surplus of trading enterprise companies (i.e. the operating surplus before allowance is made for depreciation) is estimated to have increased by 16.2 per cent in 1979-80 following the small rise of 6.9 per cent recorded in 1978-79. There was thus a small increase in the gross profit share in 1979-80 (Chart 6).

The gross operating surplus of unincorporated enterprises is estimated to have increased by 10.5 per cent in 1979-80 compared with 27.8 per cent in 1978-79. The lower increase in 1979-80 reflected a much slower increase in the gross

Chart 6- Wage and Profit Shares

70-,

68

66 -

64-

62-

20-

18-

16

14

12

(a)   Wage Share

(b)   Profit Share

Average 1972-73 1973-74

1966-67

to

1972-73

1974-75 1975-76 1976-77 1977-78 1978-79 1979-80

(a)   The ratio of non-farm wages, salaries and supplements to gross non-farm product at factor cost. Seasonally adjusted quarterly estimates of the wage share are published in the Treasury publication Round-up of Economic Statistics.

(b)   The ratio of the gross operating surplus of trading enterprise companies and financial enterprises (less imputed bank service charge) to gross non-farm product at factor cost. operating surplus of farm unincorporated enterprises, in contrast to the very large rise in 1978-79.

Fiscal Conditions

Public sector final expenditure contributed around 0.2 percentage points to product growth in 1979-80, the smallest such figure for many years. This, together with the significant reduction in the Commonwealth sector borrowing requirement, contributed importantly to the improved performance of the economy in 1979-80.

The continued policy of Commonwealth expenditure restraint was reflected in the slight reduction, in real terms, in Commonwealth Budget outlays in 1979-80. Over the previous three years, outlays grew in real terms at an average rate of about one per cent per annum. While this has resulted in a gradual reduction in the size of the Commonwealth Budget sector relative to GDP, much of the reduction in the Budget deficit has reflected increased receipts which, over the four years to 1979-80, rose slightly relative to GDP.

The 16.0 per cent increase in Commonwealth Budget receipts in 1979-80 was somewhat faster than in recent years, mainly reflecting the strong growth in personal income tax and a further large increase in revenue from the crude oil levy. The latter included the additional revenue resulting from the Government's decision to retain the crude oil levy proceeds associated with the increased import parity price following the December 1979 OPEC oil price rises. Mainly as a result of this decision, the Budget deficit of $2034 million was some ^ $160 million lower than the Budget estimate. The very large reduction in the' deficit in 1979-80 ($1444 million) was important in containing additions, to the money supply and pressures on interest rates and in enhancing investor confidence.

The slight fall in real terms in Commonwealth Budget outlays in 1979-80 was not matched in the State and local government sector, where outlays are estimated to have shown real growth of over 2 per cent. This did, however, represent some deceleration: State and local government outlays rose at an average annual rate of 3.0 per cent over the three years to 1978-79. Growth in the outlays of the State and local government sector has not resulted from expanded direct assistance from the Commonwealth Budget, which declined in real terms over the four years ending in 1979-80. Rather, it has reflected faster growth in funds available to State governments and authorities from their own sources and from increased borrowing programs.

Notwithstanding the continued real growth in outlays by the State and local government sector in 1979-80, the reduction in Commonwealth Budget outlays permitted a further slight fall in the size of the public sector as a whole relative to GDP, as shown in Table 11.

Table 11 - Public Sector Outlays as a Percentage of GDV(a)

(a)   Quarterly information on Commonwealth and State government finance is published in the quarterly

Public Finance supplements to the Treasury publication Round-up of Economic Statistics. (Jb) Direct assistance from Commonwealth Budget, including State government Loan Council programs.

(c)   Net of all transfers between Commonwealth and Stateandlocalgovernmentsectors. However, because interest payments on past advances from the Commonwealth are included in State and local government sector outlays, columns 1 and 3 do not add to column 5.

(d)   Preliminary.

The large reduction in the Commonwealth Budget deficit in 1979-80 resulted in a similar reduction in the total public sector borrowing requirement. Figures for recent years and an estimated level for 1980-81 are given in Table 12.

Table 12 - Public Sector Borrowing Requirement(a)

(a)   Public sector borrowing requirement as here denned includes Commonwealth Budget deficit and net borrowings by Commonwealth authorities as well as net borrowings by State and local semi-government authorities. This is one of several possible definitions of the public sector borrowing requirement: further information is provided in Statement No. 6.

(b)   Estimated.

Monetary Conditions

Monetary conditions and instrument settings in 1979-80 resulted in a faster growth in the money supply (M3) than the conditional projection in the 1979-80 Budget Speech that growth in M3 'of about 10 per cent over the course of the year would be compatible with policy'. The broadly defined volume of money (M3) grew by 12.9 per cent during 1979-80, compared with the 11.8 per cent increase recorded during 1978-79. After allowance for the statistical aberration relating to State government holdings of banks' certificates of deposit referred to below (see page 37), the increase in M3 during 1979-80 was 12.3 per cent.

The major factors in the formation of movements in the volume of money (M3) are set out in Table 13 and illustrated in Chart 7. There were important differences between 1979-80 and earlier years. In the first place, there was a sizeable surplus (for the first time since 1972-73) on private sector foreign exchange transactions of $974 million, compared with deficits of $1202 million in 1977-78 and $254 million in 1978-79. Secondly, there was the much lower contribution from the domestic Budget deficit ($567 million) than in 1978-79 ($2258 million). (Details on how the Budget deficit was financed are given in Table 14.) Thirdly, Rural Credits advances made a negative contribution to monetary growth instead of the small positive contribution in 1978-79. Rural Credits advances from the Reserve Bank to the Australian Wheat Board in respect of the 1979-80 crop were limited to $800 million and, principally because of an exceptionally high rate of wheat shipments, the Australian Wheat Board was able to repay within the year a large part of those advances together with the amounts outstanding in respect of advances on previous years' crops. Largely as a result, Rural Credits advances outstanding in June 1980 were $285 million lower than a year earlier.

The net result of these three factors was an increase in private sector holdings " of liquid assets and government securities (LGS) in 1979-80 of $1200 million, the smallest increase for any year since 1973-74.

The main factor in the monetary overrun in 1979-80 was the much faster expansion in trading bank advances than had been expected. This very largely reflected the fact that, following the rapid rise in interest rates in some overseas countries early in the year and increases in interest rates on loans by other domestic financial institutions, demand for lower cost trading bank loans increased sharply.

Chart 7- Major Factors in the Formation of Movements in the Volume of Money S million

Budget Contribution to Private Sector LGS Assets

3 000 2 000 I 000 0

I 000 0

Private Sector Foreign Exchange Transactions

ET

-1 000- -2 000-

3 000' 2 000 I 000' 0

Private Sector LGS Assets !!J*fcli*fcl

2 000-1 1 000-

Private Non-bank Take-up of Commonwealth Government Securities

3 000 2 000' 1 000' 0

Loans and Advances -All Trading Banks

2 000- 1 000- 0

Loans and Advances- Savings Banks

Hi

6 000 5 000- 4 000- 3 000 2 000 1 000' 0

Volume of Money r./"-"">r

> - 1

1974-75 1975-76 1976-77 1977-78

Positive contribution to money formation

1978-79

iiSa Negative contribution to money formation

1979-80

1978-79

1979-80

VO CO

70

Torn

VI

m Z H > H

<

ffl VI

Average weekly figures basis except for private sector foreign exchange transactions. Budget deficit, Budget overseas deficit. Budget contribution to private sector LGS assets, and noldings of the public of Commonwealth Government securities which are on a last day basis, and private sector LGS assets which is partly last day. Figures represent movements except r nratthree items. Not seasonally adjusted. Quarterly money formation figures are published in the quarterly Public Finance supplement to the Treasury publication Round-up of Economic

Equals Budget domestic deficit.

Defined as the movement in Reserve Bank holdings of gold and foreign exchange adjusted to exclude Government budgetary and financing transactions overseas, other non-monetary movements and valuation effects arising from changes in the foreign currency value of these assets and from exchange rate variations.

Includes Reserve Bank transactions in commercial bills, other loans and advances, and miscellaneous accounts and the balancing item (largely due to the difTerent timing bases used), uehned as banking sector LGS assets (the sum of its holdings of notes, coin, cash with Reserve Bank, Treasury bills. Treasury notes and other Commonwealth Government securities) plus noldings of the public of notes and coin and Commonwealth Government securities. if) Defined as holdings of the public of notes and coin plus deposits of the public with banks (including deposits with the Reserve Bank), (p) Preliminary.

(c)

VO

Year

1978-79

1979-80

(a)   Quarterly information on government financing transactions is published in the quarterly Public Finance supplement to the Treasury publication Round-up of Economic Statistics.

(b)   Other financing transactions include funds obtained from coinage and bullion transactions, amounts borrowed by Commonwealth Government trust accounts, net amounts available from Commonwealth Government trust account transactions in government securities, amounts available from moneys held in trust, etc.

(c)   An explanation of this concept is given in 1980-81 Budget Statement No. S. id) All figures shown for the sectoral composition of domestic borrowings are on a last day basis.

(e)   Includes movements in holdings of Treasury bonds. Australian savings bonds, special bonds, income equalisation deposits, drought bonds, etc., and associated inscribed stock.

If)Includes movements in the holdings of governmenl securities of Commonwealth Government and State Governments, and State Government and non-financial Commonwealth semi-government authorities (but excluding special loans, changes in holdings of internal Treasury bills and cancellations of sonic securities). For given domestic borrowings, increases in such holdings reduce private sector and Reserve Bank portfolios of net government debt. If changes in government sector holdings are subtracted from domestic borrowings this gives a concept which the Reserve Bank terms net domestic borrowing requirement, data for which are published quarterly in the Bank's Statistical Bulletin. Subject to a few minor qualifications, this shows the change in indebtedness of the Budget sector to the private sector and Reserve Bank.

Or) Includes take-up of Treasury bills. Treasury notes and other government securities, as well as (he Commonwealth Government's use of cash balances (such cash balances are an asset of the Commonwealth so Chat their use increases the net indebtedness of the Budget sector).

(p)   Preliminary.

73W TJ 73 PO

t/J m Z H >

C/5

c era c

VO CO

©

ef

In fact, advances outstanding of the major trading banks rose strongly in 1979-80 and, over the course of the year, increased by 16.7 per cent. Although for the year as a whole the increase in net new overdraft limits was within the Reserve Bank lending guidance of not more than $30 million per week, during the first five months such limits increased, on average, by more than $40 million per week (on a seasonally adjusted basis). This not only contributed to the growth in advances outstanding but, by adding to the stock of unused overdraft limits, supplemented the potential for further growth in advances through increases in the usage ratio later in the year. Following the US monetary measures of 6 October 1979, the rate of overdraft usage rose quickly to a level some 2 to 3 percentage points higher than a year earlier. The overdraft usage ratio remained at this level for some months before jumping again - to some 4 to 5 percentage points higher than a year earlier - late in the financial year. The interest rate charged to prime borrowers on bank loans in excess of $100 000 increased by around 1.5 percentage points to about 12.5 per cent during the year. The interest rates charged on smaller overdrafts generally rose by 0.5 percentage points to the maximum permitted rate of 10.5 per cent.

As part of the policy to restrain bank lending, the Statutory Reserve Deposit (SRD) ratio of the major trading banks was raised from 5.5 per cent to 6.0 per cent on 6 December 1979.

Non-bank take-up of Commonwealth Government securities during the year may be usefully considered in four distinct stages: the pre-Budget period; from the Budget to 6 October; from 6 October to 30 April when the tap system for marketing Commonwealth bonds was introduced; and the period after 30 April.

Prior to the Budget, securities markets were unsettled. This probably reflected, in the main, concern about the implications for inflation of the high rate of monetary growth during 1978-79. The large sales of Australian Savings Bonds (ASBs) during this period were mainly due to a temporary lack of confidence in some financial intermediaries. Investors' confidence in the bond market appeared to be restored by the announcement of a substantial reduction in the estimated Budget deficit and, hence, in the Commonwealth sector borrowing requirement for 1979-80. The pace of bond sales picked up and there was some, albeit tentative, demand for longer bonds.

Following the US monetary measures on 6 October, the bond market weakened. There were steady sales of ASBs and non-bank holdings of Treasury Notes increased quite rapidly, but non-bank holdings of bonds fell progressively. Notwithstanding this deterioration in the bond market and its implications for short-run monetary control, policy was concerned with the need not to overreact to what appeared likely to be a temporary rise in overseas interest rates. As was pointed out in this Statement last year, large and erratic variations in policy settings are likely in themselves to impair economic performance. Overseas rates, notably in the United States, did fall back sharply later in 1979-80; however, the intervening period proved a difficult one in which to restore more favourable conditions for selling government bonds. During January the Reserve Bank increased the yields on its 'de facto' tap stocks by 0.4 percentage points. In February two bond tenders were conducted and in view of the results the Reserve Bank again increased the yields on its 'de facto' tap stocks. However, on each occasion market yields moved away as overseas interest rates continued to rise, and non-bank holdings of bonds continued to fall. ASB Series 16 was introduced on 3 March, at an interest rate of 9.75 per cent, 0.5 percentage points higher than on the previous series, but net subscriptions were negative from early April.

As noted, the tap system was introduced on 30 April. In line with market yields, the initial yield on the two-year tap stock was about 0.5 percentage points, and that on the five-year tap stock 0.6 percentage points, above the 'de facto' tap stock yields established in February. This ensured a successful debut, particularly as interest rates in the United States were beginning to fall by this time and a number of institutional buyers appeared to have been awaiting the commencement of the tap system before purchasing bonds. From the new system's introduction to 30 June, sales of the tap stocks aggregated S874 million; over the same period net non-bank take-up was $437 million.

Non-bank take-up of all forms of government securities totalled S777 million in 1979-80. While this was slightly higher than the take-up in 1978-79, it was insufficient to prevent the overrun in monetary growth resulting mainly from the rapid growth in bank advances. In particular, insufficient sales of securities were recorded in the December and March quarters, when the strong seasonal addition to liquidity through the Budget deficit and Rural Credits advances as well as surplus private sector foreign exchange transactions resulted in a rapid increase in the banking sector's liquidity base and thus facilitated the rapid growth in advances. Although non-bank take-up was higher in the June quarter following the successful introduction of the tap system, it was by then too late to affect significantly the growth in the money supply over 1979-80.

The tendency, referred to in last year's Statement, for outstanding public sector debt to be concentrated at the shorter end of the maturity spectrum continued into 1979-80. For most of the year sales of Commonwealth securities were largely restricted to ASBs and Treasury Notes, while local and semigovernment borrowing was primarily by way of sales of four-year securities. Following the implementation of the tap system, however, some lengthening in the maturity structure of outstanding debt began to be achieved.

As indicated in Table 15, private sector interest rates increased during the second half of 1979-80 and, by the end of April, most administered bank rates were at the prescribed maxima. Most significant among these interest rate maxima were the limit of 10.5 per cent on loans of less than $100 000 and, within this, the operational limit of 10.0 per cent on housing loans.

Table 15 - Interest Rates (Per cent per annum, at or near end of month)

Finance

Major tradingcornbanks Savings banks panies

(a)   Issue yields until September 1979, weighted average yield of notes alloted at tender thereafter. to Theoretical yields on a no brokerage basis for non-rebate bonds, based on average for week centred on last Wednesday of month, (c) As at last Wednesday of month. If redeemed before first interest payment date, a lower rate applies. (

(g)   Most common rate charged on new housing loans to individuals.

(h)   Bottom of range of rates current at end of month, offered on issue of first ranking debentures (i.e. those debentures which are secured by a first charge over assets) of finance companies associated with major trading banks.

Trading bank overdraft rates for much of the year were considerably below both those prevailing overseas and those charged by competing domestic financial intermediaries. The trading banks met the resultant increased demand by bidding for funds through the issue of negotiable certificates of deposit (CDs) at yields which averaged 13.2 per cent during June. In June 1980 these CDs represented about 13.1 per cent of total trading bank deposits compared with 2.8 per cent a year earlier. This resulted in the banking sector drawing in funds from the nonbank and external sectors, thus adding to the growth in the money supply- as measured by M3.

The interest rate differential between CDs and other trading bank deposits also led State governments to switch some of their funds with banks into CDs. As CDs issued to State governments are included in the money supply while State government holdings of other bank deposits are not, this switching added to the statistically measured growth in the money supply during 1979-80, accounting for about 0.6 percentage points of the growth in M3.

As usual, there was a large seasonal reflux of funds to the Commonwealth in the June quarter. The banks had been advised that the liquidity run-down was expected to be steeper than in preceding years (see Chart 8), reflecting increased provisional tax payments as a result of the lift in rural incomes in 1978-79 and higher company tax payments due to increased corporate profitability in 1978-79.

Chart 8 - Budget Contributions to Private Sector LGS Assets by Quarter S million 3 000i

-3 000

Although conditions were in fact appreciably tighter than in recent years, the run-down was handled without ameliorating SRD action, the Reserve Bank providing assistance to the market on particularly tight days so as to avoid undue disruption. In June 1980 the LGS ratio of the major trading banks was 18.9 per cent, compared with 21.4 per cent in June 1979. Firmer liquidity conditions resulted in a smaller spread between the individual banks' LGS ratios in June 1980 than in June 1979.

In contrast to the trading banks, savings banks experienced a more than seasonal outflow of funds, excluding interest credited, during the the latter months of the year as their deposit rates became uncompetitive and, over the year as a whole, savings bank deposits rose by only 7.2 per cent.

Housing loans outstanding of savings banks grew by 13.2 per cent during 1979-80, despite the much slower growth in their deposits. As a result, savings banks' holdings of LGS assets fell to 17.5 per cent of deposits in June 1980, 2.5 percentage points lower than a year earlier. There was a marked decline in the growth of trading bank housing loans as trading banks understandably concentrated lending in other, presumably more profitable, areas.

Finance approvals by major mortgage lenders grew in value by 8.3 per cent in 1979-80, following the rapid growth of 20.6 per cent in the previous year. The number of finance approvals increased by 2.0 per cent, implying an increase in average loan size of 6.1 per cent.

The upsurge in investment, particularly in townhouses and flats in some areas, meant that sources of finance outside the major mortgage lenders became more significant in the financing of dwelling activity in 1979-80. This factor, along with the lagged effects of the earlier sharp lift in finance from the major lenders, underwrote the rapid growth in dwelling activity in 1979-80.

As in other recent years, wider measures of the volume of money showed faster growth than M3. The declining relative importance of savings bank deposits referred to above is in part responsible for this development. Over the twelve months to May 1980, M3 rose by 11.9 per cent. Over the same period M4 (M3 plus permanent building society deposits) rose by 12.9 per cent, a broader measure including finance company deposits rose by 12.4 per cent, while a still broader measure including finance company and money market corporation deposits rose by 12.9 per cent.

Although net lending by the household sector (which includes unincorporated enterprises) appears to have fallen in 1979-80, that sector continued to have a large financial surplus. Despite this, net sales of ASBs (the government debt instrument especially directed to the household sector) made a relatively minor contribution of $174 million to net sales of government securities to the non-bank private sector.

The corporate sector's borrowing requirement probably remained unchanged in 1979-80. A strong increase in gross operating surplus was offset in part by an increase in tax payments and increased financing of stocks.

Balance of Payments

The balance on Australia's private sector external transactions strengthened considerably in 1979-80. A large fall in the current account deficit more than offset a reduction in net apparent private capital inflow; the resulting surplus of $974 million on private sector external transactions compares with a deficit of $254 million in 1978-79. As a consequence of these developments, the expanded official overseas borrowing program that had been embarked upon in 1977 to support Australia's international reserves was substantially reduced. The recovery in private external transactions was accompanied by a small net upward movement in the trade-weighted value of the Australian dollar; at the end of June 1980 the trade-weighted index stood at 85.0 compared with 83.1 a year earlier. The surplus on private external transactions was not sufficient to offset fully the deficit on government external transactions so that, overall, the balance of payments was in deficit by $296 million compared with $124 million in 1978-79 (see Table 16).

Table 16 - Balance of Payments: Main Aggregates ($ million, seasonally unadjusted)

A strengthening in the balance of payments was expected at the time of last year's Budget. The basic pre-conditions for an improvement had been established by the sustained application of domestic and external policies designed to restore the competitiveness and profitability of Australian industry. Moreover, it was clear that special factors (including, in particular, the excellent rural seasonal conditions in 1978-79) would assist the external account in 1979-80. Nevertheless export growth exceeded even these expectations, with wheat shipments running well ahead of previous levels and with a commodity price boom, albeit short-lived, developing in late 1979. The private capital account, however, weakened substantially during the first half of the year in the face of action by overseas monetary authorities (particularly in the United States) to tighten their monetary policies. Overall, private external transactions moved into deficit in the September quarter and a surplus did not reappear until the March quarter when the relative attractiveness of Australia's natural resources, in an increasingly uncertain world climate, contributed to the resumption of net private capital inflow, particularly in the form of portfolio investment. Private external transactions remained in surplus in the June quarter, strengthening markedly in May and June as private capital inflow reacted to a seasonal tightening in domestic liquidity and an easing of interest rates overseas.

After the deficit on private external transactions appeared in August, measures were taken to supplement reserves. These included official loan raisings in Japan yielding $264 million in the December quarter and the arrangement in December of a $US100 million placement with the Reserve Bank by the Bank for International Settlements (BIS). Reserves were also bolstered by a Special Drawing Rights allocation from the International Monetary Fund amounting to $98 million in January. A further official loan raising of $208 million was made in the Federal Republic of Germany in February.

For the year as a whole, gross overseas borrowings by the Government amounted to $471 million compared to $1557 million in 1978-79. Late in the year, the Reserve Bank repaid the $US100 million BIS placement which fell due at the end of June. The Government made two scheduled partial repurchases ($143 million) of the 1976 drawing from the IMF Compensatory Financing Facility during the year.

At the end of June 1980 Australia's international reserves were $5681 million, $1796 million higher than a year earlier. This rise was entirely attributable to increases in the market value of Australia's official gold holdings and to other valuation effects, which more than offset the reduction in reserves due to balance of payments transactions.

The current account strengthening was concentrated in the first half of the year when a sharp rise in net export volume more than offset a deterioration in the terms of trade. The current account deficit widened somewhat in the second half of the year as the volume of net exports diminished. For the year as a whole there was a fourfold increase in net exports and the terms of trade fell by about 3 per cent (Chart 9).

Current Account Deficit/Gross Domestic Product (Current Prices)(6) -4.0 J-l- 1- :- 1- 1- 1- 1- 1- 1- 1-

Average 1972-3 1973-4 1974-5 1975-6 1976-7 1977-8 1978-9 1979-80

1959-60

to

1971-72

(/>) The negative ratio indicates a current account surplus. Seasonally adjusted quarterly information on this ratio is published in the Treasury publication Round-up of Economic Slaiixiics.

The value of rural exports rose by over 40 per cent in 1979-80. The increase was concentrated in the first half of the year as shipments of the record 1978-79 wheat crop gained momentum. For the year as a whole, wheat shipments more than doubled to a record IS. 2 million tonnes while shipments of sugar, mutton and lamb also grew strongly. The volume of wool and beef exports fell in the second half of the year. Rural export prices began the year at relatively high levels and rose somewhat further during the commodity boom in the middle of the year. Prices of wheat, meat and wool eased towards the end of the year but sugar prices rose strongly.

Non-rural export proceeds also grew strongly in 1979-80, by 25 per cent. The pick-up in non-rural export volume that began in 1978-79 continued during the first three quarters of 1979-80 despite the impact on iron ore shipments in the September quarter of industrial disputes in the Pilbara. Domestic capacity constraints and industrial disputes led to reduced iron and steel exports but other manufactured exports increased substantially (see Table 17). Non-rural export prices rose steadily until the June quarter when non-ferrous metal and some other prices fell.

Table 17- Manufactured Exports at Current and Constant (1974-75) Prices ($ million)(a)

(a)   Manufactured exports are defined as comprising Section 1, Divisions 53 to 59, Sections 6, 7 and 8 of. the Australian Export Commodity Classification (AECC). Because of changes made to the AECC at the beginning of 1978-79, the figures for 1978-79 and 1979-80 are not strictly comparable with those of earlier years. It appears that the 1978-79 figures are about 2 percent below what they would have been if the AECC classification had not been changed.

(6)   June quarter estimated.

The 17 per cent growth in Australia's import bill in 1979-80 resulted entirely from import price increases (particularly for oil), which accelerated strongly in the first half of the year before slowing in the later months. The volume of imports fell in the September quarter as capital goods imports reacted to the bunching which had taken place in the latter part of 1978-79 prior to the phasing down of the investment allowance. Import volume rebounded strongly in the December quarter but then levelled off in the second half of the year, apparently in response to large stock-building in the pre-Christmas period. For the year as a whole the volume of imports was lower than in 1978-79.

The trade surplus of $2820 million was distributed fairly evenly between the two halves of the year. However, after allowance for the usual pick-up over the course of the year in the net invisibles deficit (with freight and property income payments overseas again showing the most rapid increases), the current account deficit rose to $749 million in the second half of the year from the very low level of $440 million in the first half. The current account deficit for the year as a whole ($1188 million) represented only one per cent of GDP, the lowest such ratio since the surplus on current account recorded in 1972-73.

Net apparent private capital inflow amounted to $956 million in 1979-80 compared with $1734 million in the previous year. This outcome appears to have reflected a particular conjunction of shorter-term influences rather than any weakening of the upward trend in longer-term overseas investment in Australian enterprises. Indeed identified foreign investment in Australian enterprises (which excludes certain large short-term trade credit flows) increased by 29 per cent in 1979-80.

Shorter-term factors affecting the capital account included large net credit sales of wheat, which contributed to a turnaround in marketing authority transactions from an inflow of $34 million in 1978-79 to an outflow of $556 million in 1979-80.

The net apparent outflow of private capital 'across the exchanges' (i.e. excluding undistributed income and marketing authorities) of $508 million in the first six months was associated with the emergence of a sizeable interest rate differential between domestic and overseas capital markets, and the ready availability of domestic credit, both favouring financing in Australia. The outflow was reversed in the second half of the year. The initial turnaround occurred in January with a surge in portfolio investment in Australian resource stocks in a period of booming commodity prices. The subsequent strengthening in net private capital inflow across the exchanges in the latter months of the year largely reflected a combination of falling overseas interest rates, particularly in the United States, the seasonal tightening in domestic liquidity conditions and the lift in certain domestic interest rates.

Private capital inflow across the exchanges in 1979-80 amounted to $612 million and included $200 million borrowed by State semi-government authorities for infrastructure financing purposes, all received in the last four months of the year.

WoirM Economic Bevdopraents

The world economic situation deteriorated markedly over the course of 1979-80. Price pressures resulting from overly accommodating (in some cases stimulatory) policies in 1978 and from rapidly rising non-oil commodity prices (themselves in part a product of those policies) were already evident before the series of crude oil price rises in 1979. The increases in oil prices also resulted in the re-emergence of large OPEC current account surpluses.

The acceleration of inflation in the OECD area was quite rapid. In the twelve months to May 1980, OECD consumer prices increased by 13.8 per cent compared with 9.1 per cent in the twelve months to May 1979; the OECD estimates that the energy components of member nations' consumer price indexes have directly contributed about half of that observed acceleration.

More broadly-based private consumption deflators (which apart from covering a wider range of goods and services also reflect reductions in the amount of energy consumed as a result of the substantial oil price rises) have been less volatile than consumer price indexes. But these deflators have also accelerated quite strongly during the past year.

The world-wide acceleration of inflation resulted in the major industrial nations adopting progressively tighter economic policies. At recent international meetings, including the OECD Ministerial Council Meeting in June and the Economic Summit in Venice later that month, the major industrial nations have reaffirmed that their first economic priority is the reduction of inflation and inflationary expectations through the application of determined fiscal and monetary restraint. Governments recognised, belatedly in some important cases, that firm anti-inflationary action was essential if the conditions which are fundamental to the re-establishment of sustained economic growth were to be met. Monetary policy has borne the major burden of this move towards more restrictive policies but there has also been movement to more restrained fiscal policies in some major industrial countries.

The acceleration of inflation and the subsequent policy response were reflected in sharp increases in world interest rates. These increases occurred first in the United States, where the deterioration in inflation was particularly marked; but they quickly spread world-wide as other countries raised interest rates to produce monetary growth rates less accommodative to inflationary pressures and, in some cases, to minimise downward pressure on exchange rates resulting from heavy capital outflows induced by the increased interest rates elsewhere.

In terms of economic growth, 1979-80 presented one unexpected result. Although the somewhat slower growth outside the United States was as anticipated, the continued strength of activity in the United States during the first half of the year was not generally forecast. In the June quarter of 1979, real GNP fell in the United States and, at the time, many commentators believed that this marked the commencement of a much-needed 'cooling off' period for an economy which had clearly been operating at an unsustainable level of activity and where a reduction in inflation was highly desirable. However, the June quarter movement proved to be something of an aberration, apparently largely reflecting the temporary effects of rises in petrol prices and some shortages of petrol supplies. Expenditure continued to expand strongly in the second half of 1979 despite some tightening in economic policies, particularly monetary policy. Much of this growth was attributable to private consumption expenditure. In the face of continued declines in real disposable income, consumers borrowed heavily and the saving ratio fell to record low levels.

This situation of excess demand exacerbated the inflationary situation in the United States and in October 1979, and again in March 1980, further measures were taken to tighten economic policy. At about the latter time, and not solely as a result of the then measures, economic activity began to fall away. Preliminary estimates suggest that in the June quarter 1980 real GNP may have declined at an annual rate of around 9 per cent, primarily because of very weak private consumption expenditure. Not surprisingly, given the increases in interest rates and petroleum prices, the home building and automobile industries were hit particularly hard. The rate of unemployment rose rapidly from 6.0 per cent (seasonally adjusted) in February to 7.7 per cent in June.

While some recent data have been a little stronger than those for the June quarter, the likely length and depth of the US recession remain highly uncertain. Some recovery in activity might be hoped for by the first half of 1981.

In Japan and West Germany, where the deterioration in price performance has been least despite their relatively heavy dependence on imported crude oil, economic activity continued to expand steadily throughout 1979-80; private business investment and exports were important elements of strength. Particularly given the subdued US economic situation expected in 1980-81, slower (but continued) growth in these two economies seems probable.

At this stage it seems unlikely that there will be much, if any, real growth in the major industrial countries taken as a whole in 1980-81, although continuing growth is expected in the developing and oil-exporting countries, many of which provide important markets for Australia.

The rate of increase in consumer price indexes is likely to ease somewhat during the course of the year (assuming there are no further large oil price increases) but deceleration in the more broadly based national accounts deflators is expected to be fairly modest.

As noted earlier, the oil price increases of the last year have resulted in a significant increase in the OPEC current account surplus (which could total around SUS110 billion in 1980) and in the counterpart current account deficits of the oil-importing nations. In the final analysis, all oil-importing countries (both developed and developing) must pay for the increased cost of oil imports by increasing their net exports of goods and services. In the short term, however, it is inevitable that oil-importing nations in general will face greatly increased current account deficits that will have to be financed by re-cycling of funds from OPEC. That process of re-cycling is expected to be carried out very largely by private financial institutions as was the case in the period following the oil crisis of 1973-74. As in that earlier period international financial institutions such as the IMF are also expected to play a role - on this occasion probably a larger one in view of the more extended external debt positions of many countries and the more pressing need for internal adjustment to the deterioration in their external circumstances. The task of financing current account deficits should be manageable, particularly for the industrial and stronger developing countries, but some of the poorer developing nations are likely to face increased difficulties.

Australia has not, of course, been insulated from the developments in the international economy over the past year.

An acceleration in world inflation inevitably affects the cost of Australian imports (and the prices of some exports), albeit with a lag. The increase in international oil prices has also been reflected in higher prices for both imported and domestically produced oil under the Government's oil pricing policy. However, in contrast to a number of other industrial countries, Australia has maintained firm anti-inflationary policies for some years now; the deterioration in Australia's rate of inflation has consequently been markedly less than in most other countries.

Australia's recent favourable trade performance is in no small measure attributable to improved international competitiveness, achieved by persistent antiinflationary policies and supportive external policies. However, particularly given the very moderate wage settlements now evident in the United States, Japan and West Germany, these hard-won gains in competitiveness could be quickly eroded unless the recent acceleration in wages in Australia can be contained. Australia's ability to 'ride out' the expected global slowdown will depend importantly on the success of policies in maintaining international competitiveness.







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