Wednesday, December 07, 2005 - Aussie Q3 GDP Growth Eases

A subscription is required to read the DismalScientist; it is priced too high. It is an excellent site for seeing the world wide economic numbers, but these numbers are reported in the daily press as well.

The most recent interesting numbers are out of the UK and Australia. The growth rate in these countries has slowed. These countries have had higher than average short rates for some time, but not extremely high. I believe the Aussie bank rate is around 5.25%. I could look the number up but the point is that short rates are finally reaching an effective braking point.

I very much enjoy Kudlow and Company but Larry does go on and on about the increases by the FOMC. He believes the fed should have already stopped raising rates. I believe the FOMC could stop now if other countries would follow through with additional increases. As it is, the gold price is still soaring, which implies that further increases need to be made somewhere.

The slower growth in the UK and in Australia is a counter intuitive good sign. Slower growth is needed to allow world supplies of oil and commodities to catch up with demand. The "tipping point" is a function of both new supplies and demand destruction. Equilibrium will be achieved as the world has clearly moved to a time of slower demand growth while the high price has encouraged dramatic levels of exploration. The law of substitution is also hard at work.

Kudlow is correct in that the FOMC typically has to "go too far" to cut off inflation expectations. After the FOMC is clearly on-top of the headline inflation "problem", it will be able to back up rates a notch or two. I don't think the Aussies or the Brits will be quick to lower rates with the majority of the world in a rate increasing mood. Japan, for now, is holding steady. The Japanese economy is in take -off mode so within one to a few months Japan will also increase rates.

In the meantime, energy prices are acting like rate increases to brake the world wide growth. Few countries can boast the level of non-inflationary growth seen in the US. Inflation is a bigger problem in most of the world other than the states. The world wide strength of the dollar is currently "exporting" inflation to the rest of the world. Gold continues to move up but Gold is currently like a mighty oak tree that is being chopped into by the central bank lumberjacks. When this tree falls, you had better make sure you are out of the way! The weakness in Aussie land and the UK are indications that the lumberjacks are starting to cut deep into the trunk.