International Economic Conditions

The expansion in the world economy was continuing, although some of the recent data were a little softer, especially in the case of the United States. Sovereign debt problems in Europe had also come to the fore again. However, growth in much of east Asia had remained strong. Inflationary pressures continued to be a concern in a number of regions, particularly in much of Asia.
Information on the Chinese economy had been mixed, with growth in industrial production appearing to have slowed but growth in investment and exports remaining robust. Construction activity had been strong, partly reflecting the Government's policies to encourage supply of low-cost housing. Policy measures to slow demand, especially in property markets, appeared to have had some effect, with housing price inflation falling in recent months and credit growth moderating. However, consumer price inflation remained elevated. Although vegetable prices had fallen recently, higher commodity prices appeared to be feeding into second-round effects on inflation, and non-food inflation was at its highest rate in more than a decade. This was also contributing to an increase in Chinese export prices.
Japanese GDP contracted in the March quarter by nearly 1 per cent and there had been sharp falls in most of the economic indicators for the month of March, following the earthquake and tsunami. Abstracting from the motor vehicle sector, the monthly data for April had shown some signs of stabilisation in activity, and business surveys for May had indicated a recovery was under way. In contrast, production of cars had remained low in April and exports of cars had fallen significantly. Disruptions to supply chains had also resulted in significant falls in sales or production of cars in a range of other countries including the United States, United Kingdom and Thailand, as well as Australia. However, recent indications from the Japanese automotive producers were that production was likely to return to normal levels earlier than had initially been anticipated.
March quarter GDP growth remained strong in India and concern over inflation had prompted the central bank to raise its policy rate again. GDP growth was also strong in east Asia (excluding China and Japan), especially in the higher-income economies. Despite recent falls in food prices in a number of economies, inflationary pressures remained, amid limited spare capacity. Members observed that credit growth was high in most Asian economies and monetary policy stances remained relatively accommodative.
The recovery in the US economy had lost some momentum. Consumption growth had slowed, possibly reflecting the effect of the rise in fuel prices. The housing market was still very weak, with most of the various measures of nationwide prices around 30 per cent below their peak. In the labour market, the most recent payrolls figures had been disappointing. Business survey measures of activity had fallen from their earlier high levels, but were still at levels consistent with ongoing expansion.
Output in the euro area grew strongly in the March quarter, partly due to a recovery from the harsh weather in December. The north-south divide in economic performance in the euro area had continued, with growth strongest in Germany, France and the Netherlands. In contrast, economic conditions in the Italian and Spanish economies remained weak, and there had been a heightening in concerns over the sovereign debt problems in several economies. GDP in Greece had fallen by around 10 per cent from its peak in September 2008 and further declines were expected. Members observed that the economy had been weaker than initially envisaged under the May 2010 IMF/European Union program, and that additional budget measures and asset sales would be needed to meet the program targets for the budget deficit.
Commodity prices were mostly lower than at the time of the previous meeting, although they remained at high levels. There had been falls in the prices of oil, base metals and some rural commodities in early May amid a fall in global financial markets, but prices for most commodities had since recovered somewhat. Spot prices for bulk commodities had also softened a little, but contract prices for iron ore and coking coal were expected to remain at near-record levels in the September quarter.