Here’s the full minutes of the meeting:
International Economic Conditions
Overall, the data available over the past month had indicated a continued consolidation in the global economy. Data for June quarter GDP were now available for most economies and showed that growth in the Asian region had been much stronger than elsewhere.
However, there had been some upside surprises in other countries, including positive growth in France and Germany in the quarter. Industrial production in a number of countries had been boosted by incentives for the purchase of cars and other durable goods.
There was therefore a question about the sustainability of the recovery, in particular whether the growth that had been seen was largely a one-off effect of stimulus measures or if there was also a fundamental improvement.
Members discussed the divergence that was being seen in different parts of the global economy. In recent years, there had been much discussion about the desirability of stronger demand growth in Asian economies and this was now occurring.
To the extent that Asia continued to grow more strongly than elsewhere, this would be positive for the Australian economy, with Australia’s largest export destinations now in Asia.
Members were briefed on the recent data for the Chinese economy, which had been somewhat mixed. Car sales had risen very sharply and export volumes had also been growing, including recently to the United States and Europe.
However, growth in industrial production, fixed asset investment and credit was estimated to have slowed. Members also discussed trends in the Chinese steel industry, including what evidence was available on the build-up of inventories of iron ore and steel.
Overall, members observed that some slowing in the Chinese economy relative to the rapid pace in the June quarter had been inevitable but that the longer-term prospects were strong.
Developments elsewhere in Asia indicated that growth was continuing to recover. India had recorded two quarters of solid growth in the first half of 2009, boosted by an easing of both fiscal and monetary policy.
In South Korea, industrial production had grown by nearly 30 per cent since the start of the year and was now back to its previous peak.
There had been a particularly strong recovery in production of electronic components, some of which were exported to China for assembly.
The Japanese economy was also doing better than earlier expected, though part of the growth in the June quarter was accounted for by measures to boost sales of cars and household appliances.
Nevertheless, there was a significant amount of spare capacity, with Japanese output 7½ per cent below its peak and the unemployment rate, at 5.7 per cent in July, at the highest level in the five decades for which there were comparable data.
The data for the United States indicated that the pace of deterioration in the labour market was easing. However, household spending had shown essentially no growth so far this year, and the household saving rate had risen.
The US economy was expected to grow in the September quarter, after contracting by 4 per cent over the previous year.
Members were briefed on global trends in credit growth and housing markets. Developments in business credit had been fairly similar across countries, with falls in 2009 in a number of advanced economies as companies reduced debt levels in an environment of tighter credit standards by lenders.
In relation to housing markets, members observed that in countries that had experienced better economic outcomes and/or fewer financial sector problems (e.g. China, Canada, Norway and Australia), house prices now appeared to be rising quite solidly and were above or around earlier peaks.
Even in the US and UK, which had earlier experienced significant falls in house prices, there had been some up-ticks recently.
Domestic Economic Conditions
The flow of information on the Australian economy over the past month had been mostly positive.
The staff’s expectation was that GDP data for the June quarter, due to be released the day after the meeting, would show a moderate increase in output, with growth in household consumption, business investment, public spending and exports.
Measures of sentiment had continued to strengthen. Consumer sentiment had risen sharply over the three months to August.
Liaison with retailers suggested that household spending had softened somewhat in July but had been better in August.
Measures of business confidence and business sentiment had also risen to be modestly above average. The data for business investment in the June quarter indicated a strong rise in spending on plant and equipment, with a sharp increase in spending on a wide range of capital goods, including cars.
However, this mostly reflected the bringing forward of spending to qualify for tax allowances. Car sales had subsequently fallen in July. Building construction had fallen sharply in the June quarter, but engineering construction had risen strongly.
Members discussed the broader outlook for investment, which – as a share of GDP – was around the highest levels in the 50-year history of the national accounts. The capital expenditure survey pointed to some near-term weakness in private investment, though less than expected earlier in the year.
Developments in the resources sector, especially for LNG, pointed to significant strength in the medium term. Public investment would increase because of the fiscal stimulus packages and state government infrastructure plans. Members also discussed the trend in dwelling investment.
They noted that even though the number of new dwellings completed had been lower in recent years,
