Rate rise a 'risk' to recovery

Rising interest rates are threatening to curb the economic recoveries under way in NSW and Victoria, raising fears of a return to the ”two-speed economy” dogged by uneven growth across the states…
Ahead of tomorrow’s expected rise in official interest rates from 3.75 per cent to 4 per cent, a raft of figures show the south-eastern states’ economies have enjoyed the strongest pick-up.

Job growth in the last four months of 2009 was highest in Victoria and NSW, which between them accounted for 75,000 of the 136,000 new jobs created, according to official figures.

New South Wales even posted domestic demand growth in the year to September that was above the national average. But with the Reserve Bank tipped to keep pushing up interest rates this year, analysts say momentum will soon swing back to the resources powerhouses of Queensland and Western Australia.

The chief economist at UBS, Scott Haslem, said rising interest rates would hit the south-eastern states hardest because households there generally had bigger mortgages and they lacked the kick from the resources boom.

”It’s likely to have more of an impact on NSW and Victoria than Queensland and WA, because NSW and Victoria are not getting as much of that commodity boom impact,” Mr Haslem said.

Figures published yesterday by broker AFG show the average NSW mortgage was about $400,000 in January, compared with $320,000 in Queensland and $390,000 in WA. Victoria’s average mortgage was $330,000.

The Australian dollar’s 30 per cent surge last year will also hurt the south-eastern states more because it cuts the income from key export industries, such as manufacturing and tourism.

This return of a ”two-speed” economy is expected to bring unemployment below 4 per cent in mining states from above 5 per cent now, with slower jobs growth elsewhere.

Adding to the picture of tighter labour markets, a Clarius Group index to be published today said building and engineering were among the fastest-growing areas for labour shortages.

The recruitment company said that 17 out of 20 skilled occupation groups had experienced tightening demand during the December quarter.

Faced with a two-speed economy, the dilemma for the RBA is that its only tool is the ”blunt instrument” of changes to interest rates.

Before the financial crisis, the Howard government helped to share the wealth from the mining boom by using soaring company tax flows to fund tax cuts.

But RBS chief economist Kieran Davies said this option was not open to a government looking to put the budget on a path to surplus.

”Mr Howard would always redistribute amounts around the country through tax cuts. But this time around you would think the states [benefiting from] strong employment and strong investment will be Queensland and Western Australia,” Mr Davies said.
SOURCE: Clancy Yeates – Sydney Morning Herald

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