Reserve Bank of Australia Annual Report – 1962 Introduction

The immediate prospects facing Australia at the beginning of 1961/62 had changed radically from those of a year earlier. A boom had come, and gone. In its wake followed uncertainty and doubt with demand weakening, growing accumulations of stocks and unemployment.

When the year began, production and employment were still falling, unemployment was high, stocks were excessive and there was still a feeling of financial stringency. There was some reason to believe that recovery would not be long delayed but confidence was weak and not to be quickly restored. Early signs of increasing activity were short-lived. It was not until early in the second quarter of the year that a turning point in activity was reached.

The official policies of the first half of 1961/62 would have been adequate, perhaps more than adequate, for conditions of buoyant expectations. They proved insufficient in the face of continued hesitation. It was in these circumstances that the Commonwealth Government's measures of February, 1962, were introduced. The trend of recovery strengthened in the second half of the year; the rise in employment continued and unemployment fell. Imports reflected the broad changes in Australian conditions. Imports had fallen in the second half of 1960/61 and were lower again in the first half of 1961/62. Thereafter, the movement was slowly upward.

Additional strength was given to our international position by two factors—the increase over 1961/62 in the volume of exports; and the improvement, although only marginal, in our terms of trade with the rest of the world. Over the last ten years, physical production for export has doubled in volume. The benefit has largely been lost by worsening terms of trade, but in 1961/62 a rise in export prices secured the full benefit of higher production for Australia.

The bulk of the increasing exports came from the traditional export industries. There were large increases, however, in the exports of some of our basic industries—coal, iron and steel—although these formed a small proportion of total exports. It is disappointing that other manufactured exports added little to the total and particularly that exports of some manufactures fell.

The strength of exports and the slower flow of imports enabled Australia to repay her drawing from the International Monetary Fund and increase the level of international reserves, despite a substantial net fall in capital inflow. This fall was due more to short term factors than to a changed attitude towards long term investment.

The financial diversification of the economy has added to the complexity of economic fluctuations. The attitudes of individuals and business enterprises towards the structure of their assets and liabilities have tended to become more sensitive and important. In the face of the doubts and uncertainties prevalent at the beginning of the year, both firms and individuals were seeking to shorten the structure of their assets towards more liquid forms and to reduce the scale of their indebtedness. Consequently, funds which might otherwise have been available for expenditure were employed to reduce indebtedness and to increase liquidity, tending to delay the recovery of production and employment.

It was therefore appropriate for monetary measures to meet the increased desire for liquidity and so to reduce the severity of its retarding effect on expenditure. Banking policy was directed to making access to bank loans easier. There was an increase in the supply of money and scope for a shift in liabilities of the government and private sector from outside to within the banking system.

This policy softened the effect on expenditure of the greater desire for liquidity and made recovery financially practicable as demand became sufficient. But the policy put the economy in a highly liquid condition—one in which the reappearance of a greater willingness to move into less liquid assets, to incur indebtedness and spend more freely, could bring a return to financially inflationary conditions.

By the end of the year, expenditure was growing, employment rising and unemployment had been substantially reduced. But the danger of excess demand did not appear great. There was still a substantial amount of unemployment; there was still a capacity for greater production within industry; and expenditure on plant and equipment had failed to revive. The demand for liquidity continued and it remained doubtful whether expansion plans in process would prove adequate to restore earlier rates of growth.

Concern about the effects if the United Kingdom joined the European Economic Community helped to cloud the outlook in the closing stages of the year; and reduced rates of growth in the leading industrial countries of Europe offered less encouragement to Australian development.

There remains the task of bringing back into effective production our remaining unused resources and of ensuring a rate of growth sufficient to employ the growing work force.

It is to be expected that the pattern of development will change from one period to another as major projects are completed and as different opportunities and needs emerge. If the opportunities for continued expansion of some types of manufacturing activity characteristic of the last decade seem less, then a possibility is presented to develop other avenues of expansion (e.g. expanding export industries) and to carry out some of those tasks— both national and private—which have had to be postponed in past years.