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Re-assuring inflation prospects not a free gift to industry

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Re-assuring Inflation Prospects not a Free Gift to Industry

Statement by: Mr Bob Herbert - Chief Executive

A close look at Australia’s Inflation prospects highlights the re-assuring outlook for inflation over the next twelve months but indicates that price pressure and import competition will increasingly constrain profitability and act as a restraint on wage bargaining.

In a wide-ranging analysis of inflation, Ai Group’s latest Economic Brief indicates the consensus, both amongst market economists and union officials, is for inflation to stay low, but to edge up to around the 2% bottom of the RBA range by June 2000. These views are shared by official forecasters.

In the Ai Group's view these inflation prospects confirm Australian interest rates can justifiably be kept on hold even if the Federal Reserve moves to lift US rates at the end of June.

Employers need to be mindful of the impact that low inflation, global manufacturing prices and a high dollar may have on their budgeting and enterprise bargaining arrangements. Indeed, low inflation over the next 12 months will, itself, contribute to restrained bargaining conditions as industry continues to battle margin pressure and the associated lack of pricing power.

The Brief indicates that the four year fall in manufactured good’s prices is showing signs of easing, although the global glut that has contributed to subdued prices will take another several years to clear. At the same time that manufactured goods prices are being kept low, the recent strong kick in commodity prices will continue to strengthen the Australian dollar and squeeze manufacturing costs. These two forces will combine to restrain manufactured goods prices throughout the next 12 months, leaving little room to absorb higher wage settlements.

Another constraint will be the continuing high Australian dollar, with high volume imports pressuring local markets as our exports become less competitive on the international market. A continuing high Australian dollar will squeeze local manufacturer’s profits between the two lorces. This constraint on pricing power should continue throughout the next 12 months.

Respectable, but below expectations employment growth, reflects strong productivity growth and unusual participation rate behaviour. The structural lift in Australia's productivity performance, the outcome of a decade of reform and effort by many sections of the community, means that we can quite reasonably lift our long-term growth sights.

June 16,1999 .

Contact: Bob Herbert, Chief Executive 0419 301 764

Heather Ridout 0419 257 361

Economic Briefing available on AI Group website:

51 W aiter Street, North Sydney 2060, Ph: 02 9466 5566 Fax: 02 9955 0907 WebSite: h ttp 7 y w w w .a ig ro u p .a in .a u Formed by the merger of MTlA and The Australian Chamber of Manufactures