Reserve Bank of Australia Annual Report – 1963 Australian Economic and Financial Conditions

The Domestic Economy

The economy made progress along the path of recovery during the year, but although the growth of activity tended to become more pervasive, it could have been more vigorous.

Expenditure Series (Seasonally adjusted)* (£ million)

The growth of consumption and of public authority expenditure, together with increased expenditure on motor vehicles and a higher level of construction expenditure, provided a basis for the increase in activity. The economy also benefited significantly from the resumption of some stock-building, contrasting with the situation in much of 1961/62, when the realisation of stocks tended to impede the growth of activity. The rural sector fared better than in 1961/62, with rising export prices and increased sales of some commodities.

There were indications of a revival of private expenditure on capital equipment, which had fallen in 1961/62, but there was still appreciable business hesitancy. Sales and profits generally rose from the low levels of 1961/62 and the extent of unused capacity declined. However, the effects of the recession lingered in some industries and there was keen competition among domestic and overseas suppliers, militating against a sharp improvement in business expectations.

A general expansion of manufacturing activity had occurred in the second half of 1961/62, when industrial production rose at a fairly rapid rate. Some important classes of production, such as basic metals, motor vehicles and fuel and power, rose further to high levels in 1962/63 but the rates of growth of certain classes of textiles, building materials, chemicals and consumer durables production were not maintained and consequently the trend of industrial production generally perhaps rose less strongly than in the earlier stages of recovery.

The intake of young people into the work force was again comparatively high in 1962/63 and the migrant addition, which had declined in 1961/62, rose. Total civilian employment increased, generally at much the same rate as emerged in 1961/62, and unemployment was reduced. The number of unemployed applicants registered with the Commonwealth Employment Service was 20,000 fewer at the seasonal peak of registration in January, 1963 than a year earlier. The subsequent decline in registered applicants was not as great as during the second half of 1961/62 and at the end of June unemployed applicants numbered 81,400, compared with 93,100 at the end of June, 1962. Unfilled vacancies were higher throughout 1962/63 than in 1961/62.

Price stability was well maintained. Consumer prices edged up slightly; wholesale prices held at about end 1961/62 levels. Wage rates rose only slightly above end 1961/62 levels in the first nine months of the year, but some increase in wage costs was in view, arising from increases in margins for skill and annual leave granted by the Arbitration Commission. Price stability in Australia has enhanced our potential to compete in trade and offers an environment encouraging the growth of activity founded on sober assessment, rather than on speculative fancy.

On many counts, the needs of domestic balance were well met in 1962/63. However we are not yet making full use of available resources and there is scope for further growth in expenditure. Looking ahead, some expenditures such as motor vehicles and non-dwelling construction may tend to grow less rapidly. On the other hand, consumption is continuing to grow; public authority expenditure is expected to rise; stocks are not unduly high; and the flow of finance for housing from major lending institutions and Governments has recently been increased. Although there is still a degree of hesitancy in some industries, the generally reduced cost of finance, resulting from the reduction in interest rates in the closing months of the year, and the continuing availability of institutional finance are favourable to increased borrowing for expenditure.

External Balance

The balance of Australia's international payments for 1962/63 resulted in an increase of £65 million in our net gold and foreign exchange holdings. In addition, some £12 million of accruing reserves was used to repurchase Australian currency from the International Monetary Fund, bringing Australia's “gold” subscription to the Fund up to the full 25 per cent of our total subscription.

The increase in reserves occurred despite a rise in imports from £857 million in 1961/62 to £1,034 million in 1962/63. The rate of importing slackened after the first quarter but rose again in the last quarter of the year. All major classes of imports increased; the increase was greatest in imports of producers' materials, particularly for motor vehicle assembly.

Balance of Payments (£ million)

Import prices were fairly steady; export prices generally rose, mainly in the second half of the year, and our terms of trade improved for the second successive year. Exports reached £1,067 million, the same as in 1961/62. Wool prices rose after an unpromising start and wool exports increased slightly. Wheat shipments fell sharply from the high levels of 1961/62, when accumulated stocks were drawn upon, although a high rate of shipments to China was maintained. Sugar exports increased on a favourable market and meat exports rose. Iron and steel exports, which had reached record levels in 1961/62 when domestic economic activity was lower, fell sharply in 1962/63. But exports of other manufactured products, particularly of motor vehicles, showed some increase.

Higher imports and a rise in freight and other invisible payments resulted in an increase of more than £200 million in the current account deficit. However, excluding monetary movements arising from transactions with the International Monetary Fund, net capital inflow increased by about £200 million to £288 million, including an increase of £31 million in net official capital inflow. Repayments of credit extended to China to finance purchases of wheat from Australia were largely offset by new extensions of credit by marketing authorities. Net private capital inflow rose strongly to £251 million, more in line with earlier trends.

At the end of 1962/63 net gold and foreign currency reserves were £626 million, the highest end June level since 1951, and “second line reserves”, in the form of drawing rights with the I.M.F., were $500 million (£223 million). On this count, the present position may be regarded with satisfaction.

In the longer-run, there must be some doubts. Although world trade continued to increase and commodity prices in general have risen recently, slower rates of growth in the main industrial countries compel a cautious assessment of the outlook for commodity exports.

The monetary basis for international trade has been strengthened over recent years by defensive arrangements between national and international monetary institutions, which were extended and consolidated in 1962/63; nevertheless it is being widely debated whether international liquidity is increasing sufficiently to provide for a continuing growth of world production and trade. Some trade restrictions were reduced during the year and a series of negotiations through the General Agreement on Tariffs and Trade is being planned to reduce tariff and other barriers and to improve conditions of access for agricultural and other products. A United Nations Conference on trade and development is also being arranged. In March, 1963 the International Monetary Fund created a new facility to broaden its support for balances of payments of member countries, particularly those exporting primary products, whose export earnings fall temporarily for reasons largely beyond their control.

In the closing stages of 1961/62, there was concern in Australia about the consequences for Australia's exports if the United Kingdom joined the European Economic Community. The breakdown at the end of January of the United Kingdom's negotiations to join relieved some of the immediate concern. The negotiations served to draw attention to the changing pattern of world and Australian trade and pointed up the advantages of diversifying the composition and direction of our trade. In particular, this re-assessment underlined the current and potential importance of Asian trade to Australia. It also lent urgency to efforts to increase exports of manufactured products.

Our balance of payments is still heavily dependent on capital inflow. The benefits of capital inflow in providing additional resources and improving our technical competence are manifest, though the costs are not inconsiderable. These costs are reflected, for example, in the actual growth of remittances abroad of earnings on overseas capital invested and in the possibility of dislocation of our external equilibrium should capital inflow fall away sharply. One response to these considerations, appropriate also on other grounds, is a greater effort to increase our own skills in production and management so as to help expand exports, replace imports competitively and reduce our technological dependence on others. There is also the possibility that greater opportunities may exist for exporting special expertise possessed by Australian industries. Further, although the flow of capital to Australia could change as a result of conditions abroad, which are beyond our control, we can guard against unfavourable changes in the assessment of our economic potential by ensuring a sound and growing domestic economy.

Australian Financial Conditions

The private sector continued to assess economic and financial prospects cautiously and to show decided preference for liquidity and security in the acquisition of financial assets in 1962/63. The amount of funds accruing to the private sector as a whole was again relatively high. The balance of changes in Government expenditure and revenue tended to place even more funds in private hands than in 1961/62; increased imports absorbed more funds than last year but the recovery in the rate of private capital inflow provided some offset.

The non-finance groups of the private sector, i.e. the private sector apart from financial institutions, showed a greater disposition to increase indebtedness in Australia, particularly to financial institutions, which were ready lenders. However, non-finance companies were less active in the new issue market than in 1961/62. Although the private capital market was in rather sober mood, monetary conditions generally were easy.

Interest rates on Government securities, bank deposits and loans and first-class private fixed interest issues fell during the year; rates in the short term money market showed little change in trend. Share prices, which had displayed weakness in the early months of the year, began to rise in October and although the market was still tentative and rather weak at times in some sectors, a more persistent underlying rising trend emerged over the second half of the year.

With investors cautious and very conscious of security, there was no sign of any revival of speculative activities such as had characterised the financial boom of 1960. Indeed, the financial consequences of that boom were even more readily apparent in 1962/63. Some large companies, which had borrowed heavily from the public during the boom to finance property development schemes and rapidly expanding business and consumer credit, found their difficulties intensified and it became clear to investors that substantial amounts of funds subscribed to these companies' issues had been lost.

Some of the circumstances surrounding these developments were such as to warrant careful re-appraisal of practices and policies in the financial and business community, particularly in relation to the protection of fixed interest lenders and standards of reporting by companies. Shortcomings in these areas by a few companies can weaken confidence in other companies. Governments, Stock Exchanges and other interested parties are actively considering measures to tighten procedures for fixed interest financing. But there is also a responsibility on businesses to apply the highest standards of financial practice and reporting.

Sydney Stock Exchange Share Price Index (AH Ordinary)

New Money Raisings by Listed Companies

The first half of the year

Private saving, both by persons and by businesses, was higher in the first half of 1962/63 than in the corresponding period of the previous year. However, gross capital formation increased even more strongly between these two periods, owing largely to an increase in stocks, but also to increases in fixed capital expenditure. As a result of these changes, the financial surplus of the private sector, available to redeem debt or to increase financial assets, was over £100 million less than in the first half of 1961/62. Nevertheless, the amounts invested in most financial assets rose. This was possible because in contrast with the first half of 1961/62, when there was a widespread tendency to reduce indebtedness to financial institutions and overseas sources, this year most forms of indebtedness increased and capital inflow from abroad provided more funds to the private sector.

Tentative estimates of changes in selected assets and liabilities of the non-finance groups of the private sector are shown below. The most notable features were the accelerated rate of growth of savings bank deposits and the net acquisition of Commonwealth Government securities. Fixed deposits grew at a somewhat slower rate than in the corresponding period of 1961/62. Subscriptions to debentures, deposits and notes (mainly issued by finance companies) and to unit trusts increased but share subscriptions were lower. The share market was weak over the first four months and only regained end 1961/62 levels in the closing stages of 1962. Government security yields for short and medium-dated issues were edging down.

Borrowing from trading banks, which had begun to show some trend increase towards the end of 1961/62, rose further and savings bank loans grew more strongly. Indebtedness to instalment credit financiers began to rise from about the end of 1961/62, although repayments of instalment credit were still high. On the other hand, non-finance companies' equity and fixed interest issues were lower than in the first half of 1961/62.

The second half

As is usual, the financial surplus of the private sector was lower in the third quarter. However, the growth of bank deposits continued. Government securities were again in strong demand and yields continued to decline. Fixed interest issues by companies of undoubted standing were well received, and some interest rate reductions on these issues were announced. The share market was more buoyant during this quarter, but capital raisings of non-finance companies were relatively low. Taking seasonal factors into account, the rate of growth of indebtedness to financial institutions was generally maintained.

The seasonal pattern of banking aggregates again dominated the fourth quarter; trading bank deposits declined and advances rose. Savings bank deposits continued to rise and savings bank lending was again at a high rate. Instalment credit indebtedness rose further. A reduction of ½ per cent in bank interest rates was announced at the end of March and during the early part of April Government security yields declined, with long-dated yields falling sharply. Yields edged down further in succeeding weeks. Private fixed interest issues were offered at lower rates. The Sydney share price index rose at much the same rate as in the third quarter and in June, 1963 was on average some 8 per cent higher than in June, 1962. The indexes for the automotive, pastoral and non-ferrous metals groups rose strongly over the year, while those for building and construction and steel and engineering fell.

Financial institutions

Only a relatively small part of the funds accruing to the non-finance groups of the private sector was invested by them directly in Government securities. The major part flowed to financial institutions and met the borrowing needs of the Commonwealth, States and semi-governmental bodies indirectly through investment by those institutions. The main financial institutions acquiring securities in 1962/63 were those which characteristically are considered to mobilize savings, such as savings banks and life offices, and there was little change in trading bank holdings of Government securities; this contrasted with the position in 1961/62 when cheque-paying banks increased their holdings of Commonwealth Government securities by about £100 million.

Over 1962/63, trading bank liquidity was at fairly high levels. Aggregate new lending commitments were higher than in 1961/62 and outstanding advances rose more strongly. As a result of a record increase in their deposits, savings banks had more funds at their disposal in 1962/63. They increased markedly their lending for housing, directly, and through building societies, and also added considerably to their holdings of Commonwealth and semi-governmental securities. These matters are discussed more extensively later in this Report.

Contributions to life assurance and pension funds were well maintained. Life office loans paid over were higher than in 1961/62. In the first nine months of 1962/63 total outstanding indebtedness rose at much the same rate as in the corresponding period of 1961/62 but housing loans outstanding increased more strongly. Investment in Commonwealth Government securities again absorbed the major part of the addition to life office funds in this period; holdings of semi-governmental securities rose less than in the first nine months of 1961/62 but holdings of shares and private fixed interest securities rose more.

New retail instalment credit finance extended by finance businesses began to rise in 1961/62 and continued to rise in 1962/63, mainly to meet increased demand for motor vehicle finance. There was competitive easing of lending terms in some States. Outstanding balances rose from about the end of 1961/62 even though the rate of repayment of retail instalment credit debt remained at high levels. Other lending by these financiers rose. Finance businesses had ample funds available for lending during the year. They increased their capital raisings through fixed interest issues, being responsible for the bulk of new capital raisings by listed finance and property companies, which amounted to £63 million in the first nine months, compared with £51 million in the full year 1961/62.

Instalment Credit for Retail Sales (Non-Retail Finance Businesses)

Housing finance

Largely as a result of greatly increased lending by savings banks, the amount of finance provided by the major lending institutions for new housing increased in 1962/63. Individual housing loan limits of savings banks were increased, as well as the total amount of funds provided. A large proportion of building societies also raised their loan limits. Funds drawn by the States under the Commonwealth and State Housing Agreements were about £2 million lower than in 1961/62 but the Commonwealth Government's allocation to the War Service Homes Division was £2.5 million higher. Lending for existing houses by the major institutional lenders also appeared to be higher than in 1961/62.

Includes building contracts let by Government housing authorities and loans approved by trading banks, savings banks, major life offices, the War Service Homes Division and certain building/housing societies (including some of those financed under the Commonwealth and State Housing Agreements).

*Estimate

Public authorities

The Loan Council programme for State works and housing in 1962/63 was originally set at £250 million; it was increased to £255 million in February, 1963. The Commonwealth Budget was more expansive than in 1961/62 in that expenditure, including payments in respect of the Loan Council programme for State works and housing but excluding bond redemptions, rose by £39 million more than revenue, raising the Government's net borrowing needs from £173 million to £212 million.

The bond market proved to be very buoyant. Subscriptions to the September, 1962 loan amounted to £80 million. Market yields on short and medium-dated securities, which had been edging down prior to this loan, continued to decline and terms offered on these maturities in the February loan were correspondingly shaded. That loan called forth record peace-time cash subscriptions of £127 million. Institutional investors' loan subscriptions. mainly by savings banks and life offices, were again heavy in 1962/63.

Towards the end of February, it was announced that no cash offer would be made at the time of the April conversion loan. Bond yields subsequently fell further, particularly after the reduction in bank interest rates was announced at the end of March, and the terms of the April conversion loan, offering only short and medium-term maturities, were reduced correspondingly. In May, interest rates on Special Bonds, which attracted net cash subscriptions of £31 million in 1962/63, were also reduced.

Debt maturing in Australia in 1962/63 amounted to £457 million. Conversions to new issues totalled £389 million, leaving £68 million to be redeemed.

In all, £252 million was raised within Australia from Commonwealth Government loans whilst drawings accruing to the Commonwealth from overseas loans amounted to £66 million, including £14 million drawn on the International Bank loan for the Snowy Mountains Hydro-electric Scheme. For the first time since 1950/51, public loan raisings were sufficient to finance the whole of the borrowing programme for State works and housing. In addition, it was possible to meet redemptions totalling £32 million from loan proceeds. Overall, the Commonwealth Government showed a cash surplus of £16 million. The Budget estimates had envisaged a cash deficit of £118 million; loan raisings provided more funds and debt redemptions required less than expected.

Treasury notes of thirteen weeks currency were on offer continuously from 16th July, 1962 at a price determined from time to time in the light of market interest rates. Rediscount facilities were available at the Bank. These notes replaced seasonal securities which had been offered in previous years but which had been completely run off by the end of each financial year. Treasury notes proved attractive to trading banks, dealers in the short term money market and other investors and the issue reached a peak of about £150 million in February. At the end of June, 1963, Treasury notes outstanding amounted to £69.5 million. Treasury bills on issue were reduced by £85 million over the year to £123 million; the remainder of the change in the Commonwealth Government cash position reflected in slightly increased cash balances.

An increase of £6 million in February in the Loan Council programme for local and semi-governmental bodies raised the total allocation in 1962/63 to £113 million, about £8 million higher than in 1961/62. No total limit was placed on raisings in 1962/63 by bodies with programmes of £100,000 or less. The semi-governmental loan raising programme progressed much more rapidly than in 1961/62, benefiting in particular from heavier subscriptions by savings banks. Public issues by semi-governmental bodies totalled £53 million compared with £69 million in 1961/62; the reduction was almost wholly accounted for by a decline in conversion issues from £50 million to £35 million.

Volume of Money

The influence of government transactions on the money supply in Australia may be assessed by deducting from the change in the Commonwealth Government's cash and debt positions the change in holdings of Commonwealth Government securities by the public, including non-bank financial institutions. As shown in the table on page 15, the overall change in the cash and debt positions in Australia in 1962/63 was much the same as in 1961/62. However, the increase in the public's holdings of Treasury notes and other Commonwealth Government securities was substantially greater in 1962/63 so that in the result the net contribution to the growth of the money supply from Commonwealth Government financing was considerably less this year. The balance of payments, taking account of transactions with the International Monetary Fund, also added less to the money supply than in 1961/62, but on the other hand lending by trading banks, savings banks and the Rural Credits Department contributed much more.

Volume of Money

The volume of money rose by 8.6 per cent over the year; it had risen by about 7.5 per cent in 1961/62. Once again, most of the increase in money supply took the form of additions to savings bank deposits and fixed deposits with trading banks. Current deposits with cheque-paying banks rose by £39 million (3 per cent), much the same as in the previous year.