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Australia Will Benefit From Reflation
Australia Will Benefit From Reflation

Australia Will Benefit From Reflation

Australia Will Benefit From Reflation

Since the 2007 global financial crisis, policy makers have been fighting deflationary (falling prices) and disinflationary (prices rising at slow rate) pressures. But the global economy finally appears to be entering reflation–a period of higher prices together with stronger growth. This is good news for households, businesses and governments around the world.
Reflation means the end of below trend growth, and this has widespread benefits. As demand grows, firms will expand production and will require more staff. This is good for job seekers, but ultimately it should also lead to higher wages. Although there is scant evidence of that so far in Australia, Business Insider reported.
The federal government will also benefit from reflation via increased tax revenue, as corporate profits increase and individuals return to the workforce. Meanwhile, government spending should reduce as benefit payments fall.
In its recent update on the World Economic Outlook, the International Monetary Fund increased growth expectations both globally and in Australia.
The IMF noted there has been a recovery in investment, manufacturing, and trade. This is consistent with recent manufacturing data that signals there will be solid growth in the coming months.
Manufacturing data also noted that costs are increasing, largely thanks to rising prices for raw materials. Indications are that consumer prices are also turning upwards.
The latest figures show Australian inflation creeping into the lower end of the Reserve Bank of Australia’s target range, but smoothed underlying inflation (which takes out extreme price fluctuations) is still just 1.8%.
This pick up in economic activity has occurred at the same time as corporate earnings have improved. This is a global phenomenon, but Australia is able to benefit from this via trade, particularly in the resource sector.
Investors have been taking advantage of the “reflation trade”, by piling into assets that benefit from rising growth and inflation–companies in emerging markets and who sell discretionary items, such as cars and jewelry, to consumers.
In the 6-month period since the US election, stock markets in the US and Australia have each increased around 11%.
Following the financial crisis, central bankers slashed interest rates to all-time lows, and greatly expanded their balance sheets by purchasing assets, in a bid to stimulate their economies. Until recently this had failed to stimulate global demand, but that appears to be changing.

 

 

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