1. This buff contains information that has become available since the staff report (SM/01/42) was circulated to the Executive Board on February 8, 2001. This information does not affect the staff appraisal.
2 Recent monthly indicators continue to point to slowing output growth. Foremost amongst these are:
the rise in the unemployment rate to 6¾ percent in January;
the fall in company profits—below the cyclical peak reached in the first half of 2000;
the decline in the business conditions index in January to its lowest level since December 1992, deteriorating consumer sentiment, and a decline in the leading index of economic activity;
the 7 percent (m/m) decline in import values in January (lowering year-on-year growth to 4½ percent);
and continued slow growth in credit, although there are signs of a recovery in lending to the housing sector.
3. Recent data also indicate that wage and inflation pressures remain moderate. The RBA’s preferred Wage Cost Index rose by 0.8 percent in the December quarter (3.4 percent, y/y), while average weekly ordinary time earnings rose only 0.3 percent in the December quarter, taking the annual rate down to about 5 percent (from about 6 percent in the September quarter). Also, the index of consumer inflation expectations fell further to 3.7 percent in February, the lowest level since December 1998.
4. In the financial markets, the recovery of the $A that began at the end of 2000 has reversed, reflecting both renewed strength of the US dollar, and increasing uncertainty about the course of the Australian economy. The $A is now back near its November low, having lost 6 percent against the US dollar and about 4 percent in nominal effective terms since the start of the year. Long-term government bond yields remain at around 5¼ percent, 30 basis points above comparable US Treasuries.
5. On the policy front, the government has made some changes to tax plans in response to political concerns, although the revenue impact of these changes is estimated to be small. First, the plan to modify the taxation of trusts has been shelved in the face of opposition from rural land owners and farmers (who use trusts as a way of preserving their assets for future generations). Second, the government has cut the fuel tax by 1.5 cents a liter (a 4 percent reduction in the fuel excise level) and has put on hold the planned inflation- linked increases in the tax. It is estimated that these measures will reduce revenues by about 0.1 percent of GDP per year.