Should High Employment=High Interest Rates?

High employment + commodity dependent growth = inflation + high interest rates

We can kiss goodbye to thoughts of lower interest rates next week after today's excellent employment figures, says the Employers & Manufacturers Association (Northern).

Though unemployment at 5.2 per cent is still too high, it's hard to see how it can get much lower while the economy dawdles along as it is, the association says.

"Despite employment and wage pressures rising, the Reserve Bank should not raise interest rates next week," said Alasdair Thompson, EMA's chief executive.

"Economic growth is too weak.

"The Bank missed the opportunity to make a meaningful reduction earlier on, and it has now passed.

"The good employment figures and significant wage settlements trending up to four cent and more, and above the inflation rate, mean the Bank is unlikely to cut the OCR without evidence of substantial productivity improvements.

"That evidence is hard to find.

"The present level of economic growth is inadequate despite our relative employment strength. Growth at present results mainly from high world prices for our agricultural commodities and the competitive currency position.

"The main policy levers for better rates of growth are in the hands of Government, not the Reserve Bank.

"Though exports of elaborately transformed manufactures have been growing strongly, up 19 per cent to $9 billion for the year ended June, the most recent figures show investment for this sector lagging far behind at about three per cent a year after a lengthy decline.

"Our successful companies in the sector relocate production offshore at around the same pace as new firms grow.

"So long as we're tied to an over dependence on commodity exports, our inflation rate will be dictated by market conditions offshore.

"To break out of this pattern, we need to leverage off today's modest surpluses to boost productivity by investing urgently in education, skills training and new technology at all levels.

"In general we're still behaving as if we can lift economic growth by producing more volume rather than investing further in knowledge intensive, higher quality and higher margin differentiated products.

"The truth is our country, with a population smaller than many world cities, should be able to identify the barriers to growth and overcome them. If our political leaders continue to fail in this respect, we'll keep on sliding to the bottom rung of OECD country performance."

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