The Economy this month as at October 2007

$A surges as $US weakens

A combination of a weaker United States (US) currency and increased support for the Australian dollar ($A), has seen the $A break the US 90 cent barrier. At the time of writing, the $A was valued at US 90.3 cents. As the table below shows, the recent increase in the $A has been less significant against non-US currencies.

Source: Reserve Bank of Australia

The rise in the value of the Australian dollar lowers the cost of imports but makes exports more expensive on world markets. A higher $A is therefore generally considered to be bad news for exporters but positive news for consumers and retailers.

Consumer spending momentum continues

The pick up in consumer spending continued over August, despite the 0.25% rise in interest rates. Retail sales were 0.7% higher in August. This rise came off the back of a 0.8% increase in July and a 1.6% jump in June. Annual growth in retail spending now stands at a buoyant 7.8%. With retail spending being the largest component of aggregate demand, the August result should support another strong economic growth number for the September quarter.

Housing industry remains subdued

Normally, new home building will be a significant stimulant to retail spending on items such as furnishings and white goods. However, the latest pick up in retail spending has come despite a subdued housing construction industry. During the month of August, the number of approvals given for the construction of new residential dwellings fell by 1.7%. The August result was 0.1% below the level recorded one year ago.

The lack of growth in new dwelling construction comes at a time of above average population growth. With housing in short supply, upward pressure is being placed on rent levels. The lack of new housing construction is also helping to support housing prices at current levels.