Reserve Bank of Australia Annual Report – 1963 Introduction

A recovery of economic activity was in train at the beginning of 1962/63. Expenditure and employment were rising but there was still a substantial degree of unemployment of labour and physical capacity and private expenditure on plant and equipment had not revived. The private sector was showing a continuing preference for liquidity, and liquid asset holdings and the scope for increased borrowing were quite high.

Official policies formulated or in force in the early stages of 1962/63 continued measures adopted during 1961/62 to stimulate private expenditure; provided for continuing growth of expenditure in the public sector; and maintained moderately expansive monetary conditions. With expenditure on consumption, motor vehicles and construction growing, confidence was expected to improve, leading to increased business investment expenditure.

These expectations were largely realised during the first half of 1962/63. Gross domestic expenditure increased at a faster rate, partly as a result of inventory accumulation, and recovery assumed a broader front. Private expenditure on plant and equipment rose. However, increases in industrial production and employment were at less rapid rates than the growth of domestic expenditure, which was accompanied by a marked increase in imports. These took the form mainly of producers' materials and capital equipment and to that extent arose from and preceded increased domestic production, but competition to supply intermediate and final demands was keen.

In February, steps were taken to increase public authority expenditure over the remainder of the financial year, including allocations for housing finance. From about this time, more institutional finance was also made available for housing. At the end of March a reduction in bank interest rates was announced and market rates on government and private issues, which had been tending to decline, fell further.

In the third quarter of the year there were signs of some slackening in private investment expenditure, including expenditure on plant and equipment. However, total domestic expenditure continued to increase over the second half of the year and the trend of industrial production rose further. Employment rose and unemployment fell, although the decline in unemployment from the seasonal peak at the end of January was not quite as rapid as in the last five months of 1961/62.

Imports rose sharply in 1962/63 from the low levels of 1961/62 but they presented no immediate threat to the overall balance of payments and international reserves rose. Although activity in major industrial countries grew more slowly commodity prices, including prices of some of our exports, rose. Import prices were fairly steady and the terms of trade moved in our favour. Total export receipts continued at record levels, despite a lower volume of some major rural exports and a reduction in iron and steel exports. Exports of other manufactures increased. But the major factor offsetting the rise in imports was the resurgence of capital inflow which, because of short term factors, had fallen in 1961/62.

The private sector's holdings of liquid assets rose strongly during 1962/63. Budgetary policy and banking movements placed more funds in private hands and the community continued to show a preference for liquidity and safety in the disposition of funds. The growth of liquidity has made consideration of economic and monetary policy more complex: it has arisen partly as a result of measures taken to encourage recovery; has reflected hesitancy within the community, which has tended to impede recovery; and has given rise to conditions which could pose problems for policy at a later stage of recovery.

Monetary policy in 1962/63 was directed primarily towards encouraging the growth of economic activity. However, the liquid condition of the economy could not be disregarded. Thus banking policy sought to maintain a relatively high rate of lending, but also to moderate the rate of increase of undrawn overdraft limits, which supplement private liquidity, and of bank liquidity. Again, in deciding to reduce interest rates, the desirability of taking the opportunity presented by trends in the capital market to reduce the costs of finance had to be weighed against the fact that interest rate reductions could tend to increase the potential danger posed by relatively high private liquidity.

Liquidity remains high, making it easy for the community to increase its expenditure sharply should its attitudes and expectations change. Part of the defence against a change in attitudes threatening the balance of the economy lies in maintaining stability of prices and flexibility in interest rates. We must look to these defences. If recent attitudes endure and become associated with a disposition to save that is consistently greater than in the 1950's, this could provide the basis for an expansion of private and public investment favourable to a high rate of economic growth.

The increase in economic activity in 1962/63 had encouraging features, with further progress towards achieving full and effective use of the work force and physical resources while preserving stability of costs and prices. However, unemployment is still too high. It is necessary to follow through with policies to encourage the growth of economic activity and to realise the potential for expansion of the economy presented by the high level of new entrants to the work force in years to come.

Nor can we overlook the need to raise the quality of the work force, at all levels of industrial and commercial organisation. In the longer-run, growth depends on many factors; but with the advance of science and technology, standards of education and the up-grading of skills have become of increasing importance.