Reserve Bank of Australia Annual Report – 1961 Economic Survey

International Developments and the Balance of Payments

A high level of prosperity was maintained throughout most of the world in 1960/61, although rates of expansion in the major industrial countries did not match those of 1959/60. The value of world trade continued to grow, but the general level of world commodity prices in 1960/61 was below that of the previous year.

The greatest increase in trade occurred between industrial countries; most continental Western European countries and Japan have emerged more clearly as having payments surpluses and strong currencies.

Changing Patterns in World Trade

According to International Monetary Fund statistics, the total value of world exports, f.o.b. (excluding the Soviet group of countries) had reached U.S. $101.8 thousand million in 1959, an increase of about 6 per cent on the depressed 1958 figure. In 1960 world exports rose to U.S. $113.3 thousand million, almost doubling the value for 1950, reflecting an increase in both the value and volume of world trade. However, the gains made by manufactured goods in this period have been far greater than those made by primary commodities. Except for the Korean War period, terms of trade have generally moved against the producers and exporters of industrial raw materials and foodstuffs, though the long term trend in the demand for those primary commodities has been upward.

This year, the tendency for commodity prices to sag, after having failed to recover fully the ground lost in the 1957/58 recession, forced producer countries to run down reserves of foreign assets and in a number of cases to borrow substantial sums abroad in order to meet the combined effects of rising domestic demand for both capital and consumer goods, the result of aspirations for development and higher standards of living.

These developments have drawn more attention recently to the problems of exporters of primary commodities. Co-operative attempts at price stabilization and output limitation have been made for a number of raw materials and foodstuffs, without always effectively easing the external problems of the producers; the growing sentiment is that something more must be done internationally, in order to smooth out the short term fluctuations while necessary long term adjustments take place.

The countries of the European Economic Community—Belgium, France, Italy, Luxembourg, the Netherlands and Western Germany—have moved further along the road towards economic integration with considerable success, especially in their external trade arrangements. Tariffs between the members were reduced and quotas increased, and trade between countries in the Community grew much more quickly than the growth in world trade as a whole. The other European trading group—the European Free Trade Association, composed of Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the United Kingdom—successfully completed their first year of co-operation. However, there was strong pressure, especially towards the end of 1960/61, for the United Kingdom to join the E.E.C.; this could work towards merged trade arrangements for all of Western Europe.

Major World Exporters — Seasonally Adjusted Exports f.o.b.

In other parts of the world, planning has been going on for the merging of national interests in trading partnerships of one kind or another. Two such groups which have already been formed are the Latin American Common Market, and Comecon which links the Communist countries. Others are being suggested in the Middle East, Africa, and South and East Asia. Although there seems to be a growing international sentiment for greater unity among nations having similar problems, economic bases for association less favourable than in Europe may limit the effectiveness of such moves.

Australia's Asian neighbours—particularly Japan and China—are emerging as important trading partners. In Japan, more liberal attitudes to imports and her demand for raw materials to feed her growing industries have helped to boost our exports there. China, faced with the necessity of increasing her food supplies, has at least for the present become an important buyer.

International Liquidity Problems

Although the experience of primary producing countries has not been favourable and prospects of improvement remain uncertain, industrial countries have, by and large, been prospering.

Continental Western European countries and Japan have emerged from the post-World War II period of reconstruction as major industrial powers and world traders. As such, they have benefited from the advances made by manufactured goods in world trade, so that for the last two or three years their export trade has been flourishing. With the added effects of high capital inflows, most of these countries have recently had substantial balance of payments surpluses, their reserves have reached record levels and their currencies have gone from strength to strength.

While some of these gains have been made because primary producing countries have been forced to run down their reserves, the United States of America has borne the brunt of the accession of reserves to Western Europe and Japan. Between the end of 1957 and the end of the first quarter of 1961, the United States Treasury lost about U.S. $5.4 thousand million in gold, most of it accruing to these industrial countries. Although the American gold stock is still high—almost U.S. $17.5 thousand million—the drain has been rapid enough to arouse a great deal of serious concern in many quarters in the United States, especially during the strain of recession and substantial unemployment that has dominated 1960/61. Balance of payments difficulties also continued in the United Kingdom last year, and actions were taken to protect reserves and sterling.

These balance of payments difficulties—deficits in the United States, the United Kingdom and the primary producing countries, and almost embarrassing surpluses in Western European countries and Japan—culminated during 1960/61 in events which exerted pressure on the dollar, with uneasy times for sterling as well. The fall in the American gold stock, the “gold-rush” of October-November, 1960, the upward revaluation of the deutsche mark and the guilder, and the extraordinary influxes of short term funds to Western Germany and Switzerland, have been taken as evidence of basic imbalances in international finance.

At the same time, increased attention has been focused on the I.M.F. as the international body that might render greater assistance both to the primary producing countries with their external problems and to the world's main reserve currencies, sterling and the dollar. Several schemes have been suggested, the idea most favoured being for the Fund to exercise borrowing powers in order to channel funds from surplus areas into deficit areas. Following the formal adoption of the provisions of Article VIII of the Fund Agreement in February, 1961, by an additional ten member countries (including the United Kingdom), the I.M.F. may be able to extend its activities further. Under Article VIII these members' currencies are fully convertible for payments of a current nature.

There is also a growing tendency for I.M.F. members to regard their Fund drawing rights as comprising a second line of international reserves and to exercise those rights rather more freely. A step taken in March, 1961, to mitigate the effects of speculative short term capital movements on sterling and the dollar was the Basle arrangement, under which European central bankers agreed that they would, when suitable, hold stocks of each other's currencies, instead of converting surpluses immediately into gold.

Australian Balance of Payments

Early in 1960/61 the balance of payments prospect was unfavourable. Wool production and prices were down, and with imports freed from restrictions and stimulated by the domestic boom, substantial drawings on international reserves seemed inevitable. In November further official action was taken to reduce excessive internal demand. Nevertheless imports continued at a high level for most of the year, and the inflow slackened significantly only in the last few months.

Despite the unfavourable early outlook, reserves rose by £39 million over 1960/61 as a whole. After falling by £136 million in the first half to the lowest level for over four years, they rose by £175 million in the second half. This substantial improvement resulted mainly from the £78 million I.M.F. drawing, a rise in wool prices, an unprecedented rate of private capital inflow, and large unexpected wheat sales. The last two factors made major contributions to the change in the short run position, but there is as yet little assurance of marked improvement in the longer term balance of payments prospect.

A summary of the balance of payments for the last three years is shown below.

Following the steps taken in February, 1960, Australia was substantially free of licensing restrictions on imported goods in 1960/61. In the first four months of 1960/61 imports were arriving at an annual rate of about £1,140 million, and at this rate were threatening a serious running down of our international reserves. In November, 1960, the Government announced policy measures primarily designed to restrain the boom and to dampen the level of internal demand; these also tended to produce a reduction in the demand for imported goods. As part of the general tightening of bank credit which was included in these measures, banks were asked to be especially restrictive in allowing the use of bank advances to finance imports.

It was not thought that the range of measures adopted was likely to produce a substantial immediate effect on the level of import arrivals because of the lag between the placing of foreign orders and the arrival of the goods. However, it seems probable that the flow of imports was further sustained by the extension of credit terms to Australian importers by overseas suppliers, and imports in the March quarter continued at an annual rate of almost £1,140 million. During that quarter, however, the monthly rate of import arrivals began to slacken, and by June the annual rate of flow was down to about £900 million.

Import Prices, Export Prices and the Terms of Trade

Imports for the year as a whole reached the record figure of £1,084 million, which was £138 million higher than in 1959/60. The increase in imports was fairly general throughout the whole range of imported goods, but the largest increases were in imports of raw materials, components, and equipment associated with the local industrial boom. Imports of iron and steel more than doubled to £55 million in 1960/61, notwithstanding the associated reduction of exports of iron and steel which also took place. This was the clearest case of demand “spilling over” into imports; however, other large increases occurred in motor vehicle components and parts, and machinery and metal manufactures.

The sources of supply changed appreciably. The United Kingdom's share of our total imports fell from 36 per cent in 1959/60 to 31 per cent in 1960/61, and it supplied only £10 million of the increase in imports. Imports from the United States of America rose by £67 million, an increase of 45 per cent on the 1959/60 level; those from Japan rose by £24 million (up 58 per cent) and those from the European Economic Community by £19 million (up 18 per cent).

After some improvement in the previous year, the terms of trade moved against Australia in 1960/61 and returned to the low levels of 1958/59. On average, export prices were about 7 per cent lower than in 1959/60 although, at the end of June, they were not much lower than in June, 1960. The decline in wool prices towards the end of 1959/60 continued into 1960/61 and there was a sharp fall at the opening, in August, of the main wool sales. Prices strengthened after the Christmas recess, and by April had risen to the levels of a year earlier. However, the average price for the year was about 8 per cent lower than the average for 1959/60. Wheat prices were much the same as in 1959/60 but prices for butter and metals were lower.

Import prices again rose fractionally during 1960/61. The prices of petroleum and most raw materials fell, but these falls were more than offset by increases in the prices of manufactured goods.

Export income at £937 million was the same as in 1959/60. Adverse seasonal conditions reduced the wool clip by about 60 million lb. and the volume of wool exported fell correspondingly. Prices also were lower and the value of wool exports fell from £410 million in 1959/60 to £356 million in 1960/61. Japan easily maintained its newly-won position as the largest customer for our wool, taking about 30 per cent of total exports of wool. The fall in wool exports was almost offset by an increase in the value of exports of wheat and flour which rose by £45 million to a record figure of £122 million. The major factor in this increase was the sale of over 40 million bushels worth about £27 million to China. Shipments to Europe also rose in 1960/61 due to crop failures in that area.

Direction of Australian Trade — Percentages of Totals

Lower production greatly reduced beef and veal exports, the value of which fell by £15 million. Lower production and a sharp fall in United Kingdom prices reduced the value of butter exports, but exports of sugar rose. Exports of copper and copper ores and concentrates rose by £6 million, and there was an improvement in exports of other ores and concentrates. In addition, exports of coal rose by £3 million due mainly to strong Japanese demand.

The local demand for iron and steel reduced the quantity available for export (as mentioned above) and the value of exports fell from £31 million in 1959/60 to £28 million in 1960/61. However, this fall was more than offset by increases in exports of other manufactured goods, particularly vehicles, machinery and petroleum products.

Net invisible payments in 1960/61 were about £17 million higher than in 1959/60. Higher freight payments associated with the increased flow of imports were partly offset by receipts from increased expenditure by overseas ships in Australian ports. There was little change in net investment income payable overseas, but travel payments increased.

There was a net inflow of official capital in 1960/61 of about £82 million compared with £29 million in 1959/60.

In April, 1961, the Government arranged a drawing from the I.M.F. of foreign currencies to the value of U.S. $175 million (£A78.1 million) and a stand-by credit of a further U.S. $100 million (£A45 million) available for a period of one year. The proceeds of the drawing in fact represented a transfer from Australia's second line reserves to official holdings of international reserves. The foreign currencies drawn were U.S. $40 million, the equivalent of U.S. $10 million in Canadian dollars, the equivalent of U.S. $30 million in £Eng., the equivalent of U.S. $55 million in West German deutsche marks, the equivalent of U.S. $15 million in French francs, the equivalent of U.S. $15 million in Italian lire and the equivalent of U.S. $10 million in Netherlands guilders. They were all readily convertible into other currencies. The stand-by credit can be drawn upon progressively and, if necessary, the full amount can be drawn within six months from 1st May, 1961.

A service charge of ½ per cent was paid in connection with the drawing and interest is payable on the I.M.F.'s holdings of Australian currency in excess of Australia's quota. The amount upon which Australia will have to pay interest charges until repayment of the drawings commences is equivalent to about £A46 million. No interest is payable for the first three months of the drawing; a charge of 2 per cent per annum is payable for the next fifteen months and, thereafter, the rate rises by ½ per cent each half year. Normally, the I.M.F. expects that repayment of drawings should take place within a period of not more than three to five years.

Australia's second line reserves in the form of potential drawing rights on the I.M.F. now amount to U.S. $298 million (£A133 million), of which U.S. $100 million may be drawn under the stand-by arrangement.

During the year the Commonwealth Government floated two new loans in New York, each for U.S. $25 million (£A11 million). However, proceeds of one of these loans were not received until July, 1961. A loan was also floated in Canada for Can. $20 million (£A9 million) and another in Switzerland for 60 million Swiss francs (£A6 million).

Two Commonwealth loans matured in London during the year. The first, maturing in December, 1960, was refinanced by a cash and conversion loan of £Eng. 13.9 million, floated in August. The other loan of £Eng. 20.6 million which matured in June, 1961, was almost fully refinanced by two cash and conversion loans totalling £Eng. 20 million which were floated in January. Repayments under existing loans from the International Bank for Reconstruction and Development amounted to £A8 million and repayments under other loans totalled £A9 million. Australia also made available a further £3 million of its national currency subscription to the International Bank's capital for use in the Bank's lending operations to other member countries.

A feature of the balance of payments in 1960/61 was the remarkable increase in private capital inflow (including the balancing item), which rose to a record £326 million, £140 million more than in 1959/60. Much of this increase occurred in the second half of the year when capital inflow amounted to about £215 million compared with £111 million in the first half.

Although no official statistics are yet available, it is apparent that private overseas investment in Australia has continued to grow. However, there is little doubt that the high rate of capital inflow in the second half of the year was due in part to the financing of Australian importers by overseas suppliers. In addition to this deferment of payments for imports there appears to have been a growing tendency for other private short and medium term borrowing abroad. The existence of these short term liabilities suggests strongly that private capital inflow in 1961/62 may not continue at the very high rate of 1960/61.

The balance of payments in the coming year faces more than the usual uncertainties. Provided that seasonal conditions remain reasonably favourable and that the level of wool prices towards the end of the 1960/61 selling season is maintained, export income could increase. On the other hand, as suggested earlier, the very high rate of inflow of private capital in 1960/61 is unlikely to continue in 1961/62.

Towards the end of 1960/61 the annual rate of flow of imports had fallen to about £900 million. It is possible that while excess stocks remain at high levels this rate could fall further to a level well below the actual import usage of the economy. Thereafter some increase might occur but the size of the increase would be determined to a large extent by the level of internal activity. Past experience suggests that boom conditions, which are for their domestic effects alone most undesirable, may have major balance of payments implications in that a larger than average proportion of the extra incomes created is directed towards imports. At present export prices, even though current reserves appear adequate, we cannot afford to allow the demand for imports to be over-stimulated by a resurgence of near-boom conditions over any prolonged period.

With full employment and sustained economic growth as major internal objectives, our demand for imports may well continue to grow faster than external demand for our exports. This position may imply a need for structural change in the economy, which would have the effect of retarding the growth of demand for imports (while conserving the momentum of development) and of speeding the growth of export income. Whatever the means adopted to reach it, the longer term objective continues to be that of reconciling external balance with full employment and sustained economic development.

Gold and Foreign Exchange Holdings

The high rate of importing was mainly responsible for a fall of £136 million in Australia's net gold and foreign exchange holdings during the first half of 1960/61. At the end of December, 1960, reserves totalled £376 million, the lowest figure for over four years.

During the second half of the financial year there was a marked improvement in the balance on current account and the downward trend in reserves was reversed early in 1961. From February onwards reserves steadily increased as the trade balance improved, proceeds of official borrowings were received, and as the inflow of private capital reached record levels. At the end of April the proceeds of the drawing from the International Monetary Fund added a further £78 million. By the 30th June, 1961, reserves stood at £551 million, £39 million higher than a year earlier; central reserves totalled £492 million and working balances £59 million.

AUSTRALIAN CONDITIONS

After the rapid expansion of activity and of incomes experienced in the previous year, 1960/61 was a period of reaction and readjustment. With demand running ahead of available supplies despite a mounting import bill, and with labour shortages developing in many industries, official action was taken towards the end of the first half of the year to reduce excessive buoyancy in the economy.

By the second half of the year, the tight labour position had eased, excess capacity had emerged in some industries, and the supply of many types of goods had become more than sufficient to meet demand. As conditions changed, some of the official curbs were withdrawn; however, as the year closed, the liquidity position continued tight and business plans were tinged with caution. The economy remained basically sound, but some weak spots were in evidence.

Expenditure

The rapid growth in expenditure which characterised 1959/60 slowed appreciably during 1960/61. The rate of increase in personal consumption expenditure fell throughout the financial year, and for the year as a whole there was a 6 per cent increase on the 1959/60 figure, compared with an 11 per cent rise the year before.

Expenditure on fixed investment in the private sector continued to expand rapidly in the first half of the financial year, with spending on building and motor vehicles especially high. However, as the year progressed, excessive activity in these industries was curbed by a combination of official action and forces operating within the industries themselves.

Construction expenditure, both for housing and for non-residential building, rose even further in the early part of the year from the high levels of the year before. This intensified the already excessive pressure on resources, but following the official moves made towards the end of 1960 to ease down the tempo of activity, a degree of slackness in the home-building industry emerged early in 1961. Although counter-action was taken to sustain activity in this field, fewer dwellings were commenced in the second half of 1960/61 than in the first half; however, by June there were signs that the trough in home-building had been passed. Despite some falling-off in the second half of the year, investment in non-residential building was greater in 1960/61 than in the previous year.

For the first five months of 1960/61, registrations of new cars and commercial vehicles continued to grow at about the same rate as in the previous year. However, sales fell away markedly in the months after November, and for the year as a whole, new registrations were down by 4 per cent on those for 1959/60.

Gross Domestic Expenditure

Rural investment was reasonably well maintained during 1960/61. Despite some easing in the later months, investment by industry in new capital equipment was higher than in the previous year; much of the producers' equipment involved was imported. The chemicals and oil refining and engineering industries were among those which undertook substantial investment during the year.

Expenditure on goods and services by public authorities continued to grow during the year, but rather more slowly than in 1959/60.

Supplies

In the early months of 1960/61, the sharply rising pressure of demand was calling forth increases in domestic output which were not, however, sufficient to satisfy it; it was partly as a result of this that imports were increasing. With the general easing in demand later in the year, stock accumulation, which earlier in the year had been the result of normal business decisions or of speculation, was transformed into involuntary stock-building. Output in many local industries was reduced, and the high rate of importing also began to fall.

Seasonal conditions were generally satisfactory throughout 1960/61 especially in agricultural areas; however, drier conditions in inland pastoral areas were not relieved until late in the season. Despite a fall of 3 per cent in wool production to 1,632 million lb. (greasy), a fall in cattle slaughterings, lower dairy production and reduced potato output, the index of volume of rural production was slightly higher over the year. Excellent cereal production, especially the record wheat and barley harvests, more than offset the fall in other commodities.

In secondary industry, output continued to rise at a high rate during the first half of the year, the strongest advances being made in motor vehicles and in the basic materials and power industries. More moderate increases occurred in building materials and in textiles and clothing, while production of most consumer durables was above the levels of the previous year.

In the second part of the year, a divergence in production trends became apparent, with most basic materials continuing to show increases, in contrast to sharp falls in production of motor vehicles, consumer durables and textiles.

The year opened with domestic production in many sectors becoming fully extended in response to a level of demand which was being sustained to an unusual extent by borrowing, and which could not reasonably be expected to continue over the longer term. Indications were that this high level of demand, by “spilling over” into imports, was likely to produce a sharp run-down in liquidity over 1960/61 as a whole. Some enterprises heeded these warning signals, but in other cases expansion plans pressed beyond the present needs of the economy accentuated and prolonged the boom, and exposed the enterprises concerned to the need for sharp adjustment as the November measures became effective.

Employment

The buoyancy of economic conditions early in the year imposed severe strains on the labour supply. In the subsequent readjustment, however, the demand for labour fell, and unemployment reached the highest level recorded in the post-war period.

The increase in population again exceeded 2 per cent, and the work force continued to grow because of the continued inflow of migrants of working age and an increased number of school leavers. However, the total number of wage and salary earners in civilian employment, which reached a peak of 3,087,500 in December, decreased in the following months and at the end of the year was less than in June, 1960. The amount of overtime being worked in factories also fell in the second half of the year, and there was an increase in short-time working.

Registered Unemployed Applicants and Registered Unfilled Vacancies

Unfilled vacancies registered with the Commonwealth Employment Service fell from a peak of 53,000 in November to 12,000 at the end of June. The number of unemployed applicants registered with the Service rose from a low point of 34,000 in October to 112,000 in June, and over the same period the number of persons receiving unemployment benefit rose from 10,000 to 57,000. This sudden change in the employment situation seems to have reflected the check to rising demand and some reaction to the high level of imports in 1960, rather than a loss of confidence in the longer term outlook.

Costs and Prices

Following the pronounced rises experienced in 1959/60, wages and earnings increased more slowly in 1960/61. Weekly wage rates were 2 per cent higher at the end of June, 1961, than a year earlier, compared with a rise of 6 per cent in 1959/60. Annual average earnings were 5 per cent higher in 1960/61, as against a 7 percent increase the previous year. With less overtime being worked, earnings were stable in the second half of the year.

Consumer prices were 3 per cent higher in the June quarter than in the same quarter of 1960; over the corresponding period of the previous year they had risen by 4 per cent. The Wholesale Price Index, which had risen steeply at the end of 1959/60 and in the first months of 1960/61, showed a pronounced fall up to January, finishing the year at a level 4 per cent below that of June, 1960. The movements in this index again reflected mainly changes in the prices of locally-produced goods, with meat and raw wool prices dominant.

While the rise in consumer prices over the year was a little less than in 1959/60, an annual increase of 3 per cent is still a good deal higher than the economy can afford, particularly when it is compared with the rate of increase in other exporting countries. For a variety of reasons, including stiffening competition in world markets, continually increasing costs and prices need to be more strongly resisted.

Housing Finance

In the early months of 1960/61, ready access to credit from both traditional lenders and other sources and a sense of buoyancy engendered by rising levels of spending combined to stimulate home-building to rates which clearly could not long continue. Some institutions were reducing their new housing commitments before November, but after that date there was a marked falling-off in the amount of housing finance available; in particular many finance companies virtually ceased this type of lending altogether. It was not long before the effects began to show themselves in a reduction of home-building, and early in 1961 the authorities began taking progressively stronger action designed to sustain activity in this field.

In the tighter credit conditions of 1960/61 some reduction in housing finance from the banking system was to be expected. However, the banks gave special consideration to the maintenance of the flow of housing finance both by their direct lending and by the assistance they provided through building and housing societies; these societies also received substantial help from the Commonwealth Government under the Commonwealth and State Housing Agreement. As the second half of the year proceeded, an increased flow of housing finance, both from traditional lenders and from official sources, went some way towards cushioning the fall in home-building activity.

Government Finance

Loan receipts of the Commonwealth Government in 1960/61 reflected the reduced level of internal liquidity. In Australia, new cash actually received during the year from public loans, Special Bonds and States' domestic raisings amounted to £119 million, compared with £148 million in 1959/60. Borrowing abroad yielded £26 million. Heavy conversion operations in Australia involved securities totalling £337 million, of which £269 million was converted. Securities maturing in London amounted to £Eng.35 million, and of these £Eng.34 million were refinanced by cash and conversion loans. The National Debt Sinking Fund met redemptions of £74 million, including redemptions of savings certificates and repayments of nearly £8 million to the International Bank, while redemptions amounting to £5 million were met from the proceeds of cash loans.

As the Government's economic measures became effective in restraining the level of expenditure, receipts from indirect taxation declined somewhat. However, income tax collections remained at a high level, while expenditure from Consolidated Revenue Fund was close to the Budget estimate. The amount available for appropriation to the Loan Consolidation and Investment Reserve was £143 million, compared with the Budget estimate of £126 million.

Budget provision had been made for a special loan of £83 million, to support the Loan Council borrowing programme of £230 million for State works and housing and to provide finance for War Service Land Settlement. In the event, the Commonwealth made available £90 million by way of special loan from the Loan Consolidation and Investment Reserve.

The overall cash result of the Commonwealth Government's 1960/61 financial operations was a surplus of £16 million, compared with the Budget estimate of a surplus of £15 million and an actual deficit of £29 million in 1959/60.

The Commonwealth cash position for the last four fiscal years is shown on the following page.

The Loan Council had agreed to the raising of £106 million by State local and semi-governmental borrowers in 1960/61, and actual raisings were very close to this amount. For 1961/62, the Loan Council has adopted a borrowing programme for State works and housing of £240 million and has agreed to the raising of £111 million by State local and semi-governmental borrowers.

Volume of Money

The volume of money in Australia rose by about 2 per cent over 1960/61, compared with an increase of 8 per cent in the previous year. The most substantial change in the factors involved was the smaller rise in the loans and advances of the cheque-paying banks.

Deposits of the public with cheque-paying banks, which had increased by £107 million during 1959/60, declined by £1 million over 1960/61. Factors contributing to this movement are shown in the table on the opposite page.

New Capital Raisings (by listed Companies in Australia)

Savings bank deposits increased by £57 million compared with the record increase of £133 million in the previous year.

The volume of money at June, 1961, was about 50 per cent of the gross national product for 1960/61, somewhat lower than the ratio for the previous three years. The rate of increase in debits to accounts of trading bank customers, which had risen over 1959/60, progressively declined during 1960/61. During the first quarter of the year debits were 18 per cent higher than a year earlier, but in the last quarter the level was 2 per cent lower than in the June quarter, 1960. For the year as a whole debits to accounts of trading bank customers were, on average, about 8 per cent above the average for 1959/60.

Other Finance

The year just past was marked by sharp changes of direction of the financial flows in the rapidly developing Australian capital and money markets. At the outset, the sense of the markets was one of financial ease, and it seemed to many as though the complex of recently-established and rapidly-growing borrowing and lending relationships could continue to expand unchecked. However, despite some easing of restraints in bank credit late in the June quarter, the year closed with a general sense of financial stringency and a widespread awareness of the need for re-appraisal of recent financial developments and for more sober assessment of future proposals.

The year opened with bank finance still being drawn at a substantial pace; the checks then in process of being applied had not become fully effective. With record increases in their deposits, savings banks had been giving substantial support to official investment programmes and home-building, both directly and through co-operative housing societies. Life office finances were buoyant, pastoral finance company loans were increasing, and the hire purchase industry was expanding to meet strong demand for financing car and consumer durable sales, and also for less traditional purposes such as housing and land finance. Other financial intermediaries, some of very recent origin, were finding funds readily available and investment outlets very attractive. The stock market was booming, with the share price index climbing to record heights.

In this general climate of buoyancy, business was able to finance expansion and inventories to an unusual extent by non-equity issues. Despite the evident attractiveness to borrowers of the various types of ventures, speculative and otherwise, to which they were putting the funds they obtained, interest rates in the better-organised areas of the money and capital markets showed little tendency towards the increases which might have helped slow the boom. Investors also were showing some lack of discrimination in their choice of securities in many cases. The events of this period suggest there may be need for the setting of higher minimum standards of information disclosed when issuing fixed interest securities, both from the point of view of economic stability as well as of protection of investors.

The situation changed abruptly about the middle of the year. The policy steps taken in mid- November are commonly seen as the force initiating the change, but the effect on the capital markets of the moves then made may perhaps better be viewed as an earlier and less drastic adjustment than might have occurred had the awakening to reality been delayed. By November, banks' new lending approvals were at low levels, and advances had passed their peak; savings bank deposits also began to fall. Fixed interest borrowings became more difficult, even at increased interest rates, and lenders began to seek redemption of a much higher proportion of maturing private short term liabilities. The recently increased flow of investment funds to other types of intermediary, such as unit trusts and land trusts, tended to dry up.

The hire purchase field underwent especially complex changes about the turn of the year. Companies were already withdrawing, before November, from new investment in medium term loans for land and housing, and after the November changes the withdrawal rapidly became virtually complete. The companies found that the availability of funds dropped sharply, and at least for a time redemptions of their liabilities pressed on their cash resources; at the same time the volume of available financing business fell away. Uncertainty about the proposals relating to the exclusion of certain interest payments from deductions when computing taxable income was a further unsettling factor. Against this general background, new business written moved to reduced levels, and the total of hire purchase outstandings actually fell during the second half of 1960/61.

During this period, many businesses found their liquid positions had changed sharply for the worse, and the financial reactions to the change were widespread. A number of enterprises failed, and these seem to have included, as well as certain unsoundly based financial promotions, some longer-established enterprises which had not kept their financial commitments in line with the requirements of prudence. Others carried on with assistance from from their bankers, or by means of a variety of financial expedients, such as deferred payment of trade debts, suspension of dividend payments, deferment of payment for imports, and sales of stocks at distressed prices.

Over this period, lenders paid much closer attention to the quality of the paper in which they invested. Commonwealth loans maintained their attractiveness, as did the official short term money market. Trading bank fixed deposits, with their sharply increased interest rates, rose. Most hire purchase companies were able to maintain their issues of debentures and notes somewhere near the reduced levels they desired, although at higher interest rates. However, marginal borrowers tended to find finance unavailable, almost without regard to interest rate considerations.

Despite the difficulties of adjustment outlined above, the financial markets showed considerable flexibility and a basic strength, and there were indications of confidence in the longer term prospect, both from domestic investors and from increased overseas support for selected equity stocks. The response to high grade security offerings remained reasonably satisfactory, and the share price index, after a fall of 23 per cent by November below the all-time peak reached in September, 1960, rose again by the end of June to a figure 12 per cent below that peak.

The staff paper on the Flow-of-Funds for Australia, which was recently published by the Bank, provides a statistical background to some of the developments of recent years in money and capital markets and illustrates some of the patterns of financial change which were forerunners of the rapidly-moving events of 1960/61.

Although figures have not yet been published beyond 1958, the evidence they furnish, together with some more recent observation, confirms the comments in the Board's last Report about the problems arising from patterns of growth amongst groups of financial intermediaries. The experience of recent months also suggests that, in some of the more striking instances, previous rapid rates of growth have been at least temporarily checked.

Hire Purchase

The tables in the Flow-of-Funds paper include estimates of aggregate balance sheets of the Hire Purchase Companies from 1953 to 1958 which show a growth in their balance sheet totals from £80.6 million to £328.5 million in that five year period. Of their liabilities, the only substantial groups which increased more than proportionately were Debentures and notes, and Deposits; these groups rose over the five years from £18.4 million to £165.2 million, and in 1958 represented just over half of the total funds used by the companies. These issues of relatively short term paper by hire purchase companies now comprise an appreciable element of fairly liquid financial assets in the community's range of holdings.

A rapid growth in consumer finance has in recent decades tended to accompany rapid industrial development, and the post-war expansion of the Australian hire purchase industry fits into this pattern. However, amongst the assets of the companies the item “Other Advances” has increased from £1 million to £31 million in the five years to 1958, and may more recently have totalled about £100 million. Something like half of this appears to comprise medium term loans for real estate financing. This is a recent development for the companies; the usual term of these loans greatly exceeds the term of their more traditional business, and seems also to be longer than the period for which the majority of their issues of debentures, notes and deposits are fixed. The sudden rise in these real estate loans appears to have been a significant factor in the housing and land boom of 1960, and the quite general reaction late in 1960 in the industry away from making these loans contributed to the downturn in building early in 1961.

The Flow-of-Funds tables cover the earlier growth of Unit Trusts, which by June, 1958, had grown to the stage where their balance sheets totalled £38 million. This figure does not include land trusts, which have emerged as a more recent development.