Henry Thornton writes:

The Reserve Bank Board has decided against raising interest
rates and has left the official cash rate at 5.50% as Henry predicted.

However, despite the “nirvana
economy” Australia still faces two demonstrable challenges: a current
account deficit (CAD) that is simply not sustainable, incipient inflationary
pressure whose strength is measured by extraordinary demand for various types of
skilled labour – especially those whose skills fit the resource sector – upward
drift in overall wages growth and non-tradable goods inflation running at around
3.5 %, which is also not sustainable once the resource bubble bursts or
deflates.

Whether an intensified resource
boom would help cure the CAD is very much open to debate. The current large
trade disequilibrium is a clear sign that Australian industry is not especially
competitive; indeed in some sectors we are downright
uncompetitive. Manufacturing for one, and as Nick Gruen points out the local car
industry is really “feeling the pinch”.

And Nick’s argument that the
government’s commitment to further cutting tariffs in the car
industry
will just produce pain without
gain is
certainly not going to help the massive CAD – “…in some important commodities
like wool, wheat, LNG and coal we already have sufficient regional or global
market share that we can only expand exports by cutting our
prices.”

Read the full article at Henry
Thornton.