Reserve Bank of Australia Annual Report – 1975 The Australian Economy

Balance of Payments

The Australian balance of payments swung from a substantial deficit in the early months of 1974/75 to a surplus over the last few months of the year. Imports fell sharply within the year, exports remained high, and there was a further increase in the deficit on invisible transactions. Capital inflow fluctuated during the year, but, for the year as a whole, was higher than in 1973/74.

7 Composition of Overseas Trade

Current account

Despite the depressed state of world demand, output and trade, both the volume and average prices of Australian exports of goods increased during 1974/75; in the previous year, although prices rose very rapidly, the volume of exports fell. The latest year saw a modest rise in the volume of rural exports, following the fall of 17 per cent in 1973/74. The quantity of non-rural exports rose by more than the 4 per cent increase recorded in the previous year; growth was sharpest in the first half of the year when there was an easing in pressures on domestic resources, permitting the delivery of orders placed in earlier periods of world-wide shortages. A further rapid rise in average export returns during 1974/75 occurred mostly in the first half of the year. Part of this stemmed from the devaluation of the Australian dollar in September, which increased Australian dollar returns from export contracts specified in foreign currencies. Rises in average returns from some rural exports in short supply in world markets early in the year, and from many mineral and metal exports, also made important contributions. All told, exports of goods rose by 26 per cent to $8,457 million during 1974/75; proceeds from the export of rural goods were up about 14 per cent while receipts from non-rural goods are thought to have risen by about 40 per cent.

Amongst rural exports, receipts for wheat and sugar reached record levels but returns from wool and meat dropped sharply. There were falls in the quantity of wool and meat shipped; the volume of sugar and particularly of wheat exports rose strongly. The average Australian dollar return from sugar exports appears to have been almost three times that of the previous year while average wheat export prices rose by almost a third. On the other hand, in terms of Australian dollars, average returns from wool dropped by a third and the average price of meat was almost halved. Coal was the fastest growing non-rural export; expressed in Australian dollars, prices for coal rose by about two-thirds and, with an increase in quantity, the proceeds from coal exports almost doubled. Iron ore exports also rose strongly, mainly due to a rise in average prices, while the value of exports of alumina, iron and steel rose noticeably. Although the value of motor vehicle exports fell, this was outweighed by a strong rise in receipts for machinery.

8 Balance of Payments

In the early months of 1974/75 the volume of imports of goods continued on the strong upward growth path established in the previous year. However, domestic demand was weakening rapidly in these months and it was apparent that the rising volume of imports represented a legacy from more buoyant times. The volume of imports fell sharply in the December quarter and, with the devaluation of the Australian dollar on 25 September reinforcing the effects of continuing sluggishness in domestic demand, a further heavy fall was recorded in the March quarter. By the June quarter the volume of imports was some 30 per cent below the September quarter level. An increased tariff on motor vehicles from November and the imposition of quotas on some textiles, footwear, whitegoods and motor vehicles in late 1974 and early 1975 contributed to the fall in imports. Most major components of imports declined, but falls for cars, footwear and some textile items were particularly large; imports of machinery remained relatively high. Despite the sharp turnaround within the year, the volume of imports of goods in 1974/75 was a little higher than in the previous year.

The small rise in the volume of imports of goods during the year was combined with rapidly rising prices, so that in current price terms imports rose by 34 per cent to $7,680 million. In the first half of the year the devaluation of the Australian dollar boosted further a rate of increase in import prices that was already high as a result of world inflation. Although still quite rapid, increases in import prices were smaller in the second half of the year. Imports in current prices reached a peak in the month of September (seasonally adjusted) and then began to fall as the drop in volume outweighed the rise in prices. Over the final months of the year imports at current prices remained fairly steady; in the June quarter they were 13 per cent below their December quarter level.

The visible overseas trade surplus reached $777 million in 1974/75, somewhat less than the surplus of $977 million recorded in the previous year. However, in both years there was a marked turnaround in the trade balance associated with trends in imports. During 1973/74 the trade balance had moved from surplus to deficit. A further deficit was recorded in the early months of 1974/75 but by the end of 1974 this had turned into a small surplus; during the second half of the year the surplus progressively strengthened and in the June quarter was running at a seasonally adjusted annual rate of about $2,000 million.

There was a rise of 12 per cent to $1,890 million in the deficit on invisible transactions in 1974/75; this was a little less than the increase (14 per cent) in the previous year. The inflow of reinsurance funds associated with payments to victims of the Darwin cyclone disaster restrained the rate of increase during 1974/75.

The current account as a whole recorded a deficit of about $1,110 million during 1974/75 compared with a deficit of $709 million in the previous year. However, as a result of the trends outlined above, the current account moved from a deficit of $2,100 million, at a seasonally adjusted annual rate, in the first quarter of the year to a surplus of about $200 million, on the same basis, in the June quarter 1975.

Capital account

Net capital inflow was $615 million during 1974/75, the highest since 1971/72. Official capital transactions resulted in an outflow of about $60 million; redemptions of overseas loans about offset new raisings but other transactions, mainly those associated with the purchase of civil aircraft and defence equipment, resulted in a net outflow of capital. For transactions of marketing authorities there was a net outflow of about $60 million, mainly from shipment of wheat on credit.

Net apparent private capital inflow reached about $750 million during 1974/75 compared with $250 million in the previous year. During the closing months of 1973/74 private capital inflow was encouraged by the stringent financial conditions prevailing at that time. The Government had moved to reduce restrictions on the inflow of overseas capital on 25 June; from that date there was a reduction from 33⅓ per cent to 25 per cent in the proportion of an overseas raising (with more than two years to maturity) that borrowers were obliged to lodge interest free with the Reserve Bank. On 8 August there was a further reduction in the deposit requirement to 5 per cent. Despite these reductions and the continuation of tight financial conditions, private capital inflow in the three months ended September was only about a quarter of its level in the three months to June. As outlined earlier, the current account was heavily in deficit during the September quarter and reserves were falling rapidly; in these circumstances net capital inflow during the quarter may have been discouraged by fears of devaluation. Exchange control approvals showed a large increase in repatriation of borrowings and a fall in new borrowings during the September quarter.

The Australian dollar was devalued by 12 per cent on 25 September. The large overall balance of payments deficit was a major factor contributing to an extreme tightness of financial conditions; although a fall in imports and some improvement in the current account were in train, the course of capital flows was less certain. In addition, the devaluation was aimed at increasing the demand for labour at a time when conditions in the labour market were deteriorating rapidly. It was clear, however, that devaluation would add further to inflationary pressures within Australia.

At the same time as the Australian dollar was devalued the fixed link with the United States dollar was discontinued; the change was to a system whereby the exchange rate was set on a daily basis so as to maintain the Australian dollar's average exchange value against its major trading partners. As a result of the strengthening of the United States dollar, the Australian dollar had appreciated by about 1.5 per cent since July on a trade-weighted basis despite a substantial loss of reserves over this period. Following the devaluation, the Australian dollar, on a trade-weighted basis, was at about the same level as immediately after the revaluation of December 1972. The United States dollar continues to be used as a vehicle for determining rates against other currencies.

In the two months immediately following the devaluation there was a strong net inflow of capital, perhaps reflecting an inflow of funds to institutions in financial difficulties in October and inflows deterred earlier by fears of devaluation. Exchange control statistics showed a marked upturn in borrowing approvals and reduction in loan repayments in these months; movements in other forms of investment showed little change from earlier months. On 11 November the variable deposit requirement on foreign borrowing was suspended. In addition, the embargo against foreign borrowings of two years or less was amended to apply only to borrowings of less than six months; and, on 14 January modifications were made to the restrictions which apply to non-resident investment in fixed interest securities and to deposits by overseas residents with parties such as trading banks, finance companies and the like.

As financial conditions within Australia began to ease in late 1974 and into 1975, the rate of net apparent private capital inflow fell back from the levels immediately following the September devaluation. With liquidity conditions generally very easy, despite the seasonal run-down associated with tax payments, net apparent private capital inflow remained fairly steady in the final quarter of the year.

For 1974/75 as a whole, it was estimated that there was a fall in retained earnings of overseas owned companies; this seemed to reflect depressed profits associated with difficult trading conditions in Australia during the year. On the other hand, preliminary estimates suggest there was a further strong rise in investment in branches and subsidiaries of overseas companies by related companies and a small net identified inflow on account of all other investment in companies, compared with a substantial net outflow in 1973/74. Within these estimates, investment in shares has remained subdued. After increasing quite sharply in 1973/74, overseas investment by Australians declined in 1974/75.

The Government's view remains that foreign capital should be associated with productive investment. In general it is the Government's objective to achieve the highest practicable level of Australian ownership and control of local industry; this applies particularly to the mining industry. Moreover, foreign investment in new financial institutions and in real estate (apart from that associated with other investment) continues to be not generally favoured. During 1974/75 amendments were made to the Banking Act and Banking (Foreign Exchange) Regulations, under which the Bank administers exchange control. These amendments provide a broader basis for the Regulations and widen the purposes for which exchange control powers may be used. They also provide for the extra-territorial application of the Regulations and for screening by taxation authorities of transactions with countries designated as “tax havens”.

Monetary movements and reserves

Overall, Australia's balance of payments deficit amounted to $498 million in 1974/75. The deficit in the first quarter of the year was, by itself, in excess of this annual figure. Over the next three months the deficit fell and in the March quarter a small surplus was recorded. During the final months of the year the current account showed a small surplus and, with a net capital inflow, there was a surplus of about $240 million in the overall accounts in the June quarter 1975.

The table on the following page shows the Australian dollar equivalent of our holdings of official reserve assets. Foreign currencies have been converted to Australian dollars on the basis of market rates. Consequently, movements in the value of official reserve assets reflect valuation effects as well as the net outcome of the balance of payments. Including these valuation effects, official reserve assets fell by $66 million over the year. The devaluation of the Australian dollar in September added $396 million to the $A equivalent of holdings of official reserve assets.

The composition of Australia's holdings of international reserves continued to change during 1974/75. There was a further substantial reduction in holdings of sterling as a proportion of reserves during the September quarter, and the decline continued over the remainder of the year. Holdings of Special Drawing Rights also declined during the year. On the other hand, the proportion of reserves held in United States dollars and other currencies rose further over 1974/75.

Over the final months of 1973/74 there had been a turnaround in the Bank's forward exchange operations so that, by the end of that year, the Bank had a net commitment to sell a large amount of foreign currency. The Bank's net oversold position remained at high levels in the first two months of 1974/75 and rose in September, the month in which the Australian dollar was devalued, to exceed $1,100 million. Following the devaluation new forward sales declined; this largely reflected decisions taken by importers as they weighed the risks of a further devaluation against the cost of cover. There was also a rise in cover taken out by exporters from the very low level reached in September. Together with continuing deliveries under earlier contracts, these movements resulted in a substantial fall in the Bank's net commitment to sell foreign currencies and by end June the net oversold position was a little below $300 million.

Finance

Financial conditions altered greatly and rapidly during 1974/75. At the close of 1973/74 very tight liquidity conditions prevailed, partly reflecting the substantial deficit in the balance of payments and the restrictive stance monetary policy maintained throughout the year; this situation continued in the early months of 1974/75. Subsequently conditions eased markedly and quickly as policy altered course, and by the close of 1974/75 financial conditions were generally easy.

One indication of conditions during the year is given by movements in the volume of money (M3). The growth rate of this aggregate slowed sharply over the latter stages of 1973/74 and in the September quarter 1974 the volume of money fell at an annual rate of about 7 per cent. Interest rates remained high in the September quarter and inverse yield curves on government and many private securities were maintained. Starting in June the Reserve Bank moved to moderate the fall in liquidity by releasing funds from Statutory Reserve Deposit Accounts of the trading banks. Between early June and late September the SRD ratio was reduced in seven separate steps from 9 per cent to 4 per cent. It was indicated that these releases were to assist in enabling the banks to meet the essential needs of the economy for finance but the Bank stressed the need for a generally restrained lending policy. Over the early months of 1974/75 the Bank also acted to improve the liquidity of the private sector by buying bank-accepted commercial bills. The Bank had begun to hold these bills in May 1974; from an average holding of about $18 million in June the Bank's portfolio had increased to about $56 million in September 1974. In the first half of October holdings of bills rose sharply to a peak of $159 million.

One of the principal factors contributing to the tightness in liquidity during the middle months of 1974 was a large deficit on the balance of payments. As discussed on pages 18 and 19 the variable deposit requirement on foreign borrowing was reduced in June and August and a devaluation of 12 per cent was announced on 25 September 1974. There was no cash or conversion loan in September.

The financial stringency of the September quarter was accompanied by severe difficulties for a number of companies. Early in the quarter, some company failures served to underline the difficulties facing companies in the building and property field, where activity had grown at an unsustainable pace in preceding years. It was also known that a number of major financiers had large loans outstanding in this field. Against this background, the collapse of a major company mainly engaged in property development was followed by a substantial disturbance in financial markets in early October. Funds became less readily available to a broad range of financial corporations and there was an outflow from many finance companies and, particularly, from permanent building societies. In anticipation of these flows the Bank had assured trading banks in September that it would stand behind them in regard to liquidity needs arising out of their provision of finance to soundly managed and financially viable businesses.

In early October the SRD ratio was reduced by a further percentage point to 3 per cent and arrangements to make further additions to bank liquidity were foreshadowed. The banks were encouraged to raise their lending appreciably to meet the basic immediate needs of the economy for finance; this policy was to be applied across the whole field of enterprises whether in primary, secondary or tertiary industries. Nevertheless the Bank indicated that it was not intended that banks should meet all demands for finance arising from inflation and warned that the changes did not mean that bank finance would be freely and generally available. Bank liquidity was further increased in late October through the establishment of a special facility whereby banks borrowed from the Reserve Bank funds amounting to 1 per cent of their deposits. This facility, which could be exercised through either loan or bill transactions, was provided for 180 days, with an option available to the banks to extend for a further 180 days. Banks were subsequently assured of the Reserve Bank's willingness to ease the position of individual banks whose liquidity might be affected adversely through being called upon to assist financial institutions on a relatively large scale.

Over the latter months of 1974 several initiatives (described on pages 29 and 30) were taken by the authorities to bring about an increase in savings bank lending for housing. The February company tax payment was deferred to end April, and a scheme of accelerated depreciation allowances was introduced in order to stimulate new investment.

Substantial reductions in Treasury note yields were made in early October and the yields at which short and medium-term government securities were traded declined, the yield on two year bonds falling from 11 per cent to 9.5 per cent. These reductions aimed at increasing the relative attractiveness of private sector interest rates. Issue yields on Treasury notes were further reduced over following months and yields on short and medium-term securities also fell; in the February loan a rate of 8.5 per cent was offered for two year bonds. Yields on long-term government securities remained unchanged at 9.5 per cent.

9 LGS Assets
QUARTERLY MOVEMENTS

Liquidity began to increase after early October as a result of the measures taken by the Bank, a rapid increase in the size of the Australian Government's Budget deficit, and the improvement in the balance of payments and its eventual move into surplus. This is illustrated in graph 9. Over the six months to March 1975 the volume of money (M3) expanded at an annual rate of 25 per cent. Although initially some part of this rise reflected a move from non-bank to bank liabilities by investors seeking greater security, as the period progressed financial conditions generally became much easier. Private sector interest rates, especially short-term rates, also began to fall over this period; the majority of trading and savings banks moved to reduce deposit and lending rates in March. Bank lending approvals expanded sharply by March 1975 and were close to the peak rates of 1972/73. The Reserve Bank then indicated to trading banks that lending policy would not envisage further expansion in aggregate provision of new finance by trading banks beyond levels recently recorded. Savings banks were asked in April to allow a moderation in their lending for housing to take place. The Bank's holdings of bank-accepted commercial bills declined between mid October and April but rose somewhat over the final months of the year to $55 million at the end of June 1975.

Over the final months of the year financial conditions generally remained quite easy, despite the seasonal run-down in liquidity. During the last quarter the volume of money (M3) rose at a seasonally adjusted annual rate of 17 per cent; however, after allowing for alterations in the seasonal pattern in 1974/75, due to changed arrangements for the payment of company tax, the underlying annual rate of increase was over 20 per cent. For 1974/75 as a whole the volume of money rose by 15 per cent.

Although financial conditions remained easy over the final months of the fiscal year, there was upward pressure on bond yields. The May loan offered the same yields as in February; cash subscriptions amounted to only $45 million, and $92 million of maturing securities were redeemed. Later in May and through June the private sector sought to quit substantial amounts of medium and long-term securities; at the same time funds continued to flow strongly into Treasury notes, taking non-official holdings of these securities at the end of the year to more than $2,000 million compared with less than $400 million at the beginning. In view of these developments the issue yields on 13 and 26 week Treasury notes were reduced in early July by 0.50 and 0.41 percentage points, and prices at which the Bank was willing to purchase long-term government bonds were reduced. The effect of these movements was to widen the range of yields on government securities, increasing the relative attractiveness of longer term securities, whose market yield rose from 9.5 per cent to 10 per cent.

10 Interest Rates

Early in 1975/76 the Bank took steps to reduce the free liquid assets of the major trading banks. The SRD ratio was raised by 1 percentage point in mid July, with a further 1 percentage point rise to follow in early August. In addition the banks prepaid in July loans from the Reserve Bank which had been made available to them under the special facility. The Term and Farm Development Loan Funds of the major trading banks were replenished by $82 million in mid July, with about two-thirds of the funds coming from a reduction of 0.4 percentage points in the SRD ratio. Banking policy continued to be administered so that the liquidity of the banking system would be sufficient to enable the banks to meet the basic immediate needs of the economy for finance without being too accommodating to inflationary demands.

By the end of 1974/75 the government sector had recorded a deficit very much larger than in the previous year, and net borrowing of the corporate sector had risen strongly. On the other hand, there was a sharp increase in the surplus of the household sector and an increase in the surplus of the rest of the world in its transactions with Australia. The net lending/borrowing position of the finance sector is not usually large; in 1974/75 a net borrowing was recorded.

Public sector finance

The deficit of the public sector rose very steeply during 1974/75. There was a rise in the deficit incurred by state and local government authorities but movements in the accounts of the Australian Government made a larger contribution to the overall increase.

The 1974/75 Australian Government Budget provided for a deficit of $571 million; outlays were expected to rise by 32 per cent and receipts were forecast to be 31 per cent higher. However, largely because of decisions to increase spending more rapidly, together with reductions in tax rates made in November 1974, the final Budget outcome differed markedly from that originally envisaged. The November measures included a downward revision in the personal income tax scale; new schedules were issued to give taxpayers the full-year benefit of the reductions in the January-June period. This measure was expected to cause pay-as-you-earn (PAYE) tax collections to fall about 7 per cent short of the levels they would otherwise have reached during 1974/75. Provision was made for PAYE taxpayers to anticipate end-year deductions for interest payments on housing mortgages. The rate of company income tax payable in 1974/75, in respect of the 1973/74 income year, was also reduced in November from 47.5 per cent to 45 per cent.

In the event, the deficit totalled $2,561 million in 1974/75, much the largest recorded in the post-war period even allowing for price increases. Spending expanded at the exceedingly rapid rate of 46 per cent. This was faster than the strong growth of revenue, which rose by 28 per cent. Despite adjustments to tax schedules in the Budget and in November, PAYE income tax collections rose by 43 per cent; this resulted from the effect of the progressive tax scale in the face of very rapidly rising wage and salary payments. About $70 million was devoted to miscellaneous financing transactions during the year and, as there was little net financing from overseas, $2,638 million had to be raised within Australia. During 1973/74, the comparable figure was only $296 million.

A large part of the Government's 1974/75 domestic borrowing requirement was financed by way of Treasury notes taken up by the trading banks and money market dealers. Treasury notes on issue increased by $1,689 million during the year after falling by $38 million in 1973/74. In contrast, net bond raisings contributed only $289 million, less than half the amount raised in the previous year. The private sector was able to increase its holdings of bonds by a good deal more than the amount of new issues as there were net sales of bonds by the Reserve Bank. Overall the Bank reduced its holdings of government securities by $168 million; the Government ran down its cash balances with the Bank by $660 million.

Private non-bank groups contributed about $610 million to the financing of the Government's borrowing requirement during 1974/75; within this total, money market dealers increased their holdings of government debt by $383 million, after a fall of $381 million in 1973/74. Holdings of debt by the banking system rose by about $1,400 million. Trading banks increased their holdings by about $1,420 million compared with a fall of $76 million in the previous year. Savings banks' holdings of government debt fell by around $20 million, after rising by $156 million in 1973/74; the decline in holdings last year was associated with the lowering of statutory requirements in September 1974. In total, the private sector took up government debt with a face value of $2,010 million in 1974/75. At the same time the Australian and state governments increased their holdings of government securities by about $137 million. The remainder of the domestic borrowing requirement ($492 million) came from the Reserve Bank.

The deficit of state and local government authorities, despite larger grants from the Australian Government, is thought to have increased considerably in 1974/75. Advances from the Australian Government provided about $1,250 million towards the financing of this deficit in 1974/75, substantially more than the $750 million in the previous year. The other main source of loan funds came from issues of local and semi-government authorities. Gross raisings by these authorities came to $690 million in 1974/75, compared with $570 million in the previous year. As usual, a large proportion of these funds was provided by the savings banks.

Corporate sector finance

Net borrowing by non-finance companies rose sharply during 1974/75. This outcome was accompanied by a major scaling down in the operations of many companies, especially early in the year. A fall in company profits, which in most years are by far the largest source of finance for companies, occurred as funds were required to finance a large, involuntary rise in inventories in the first half of 1974/75. In addition companies reported an increased need for funds to finance debtors. On the other hand, a slowing in the rate of growth of fixed investment spending, in current price terms, reduced the amount companies had to borrow. Nevertheless, early in the year, many companies faced severe difficulties in obtaining needed funds. With sales sluggish, many had little alternative but to institute measures to cut costs and, in some cases, reduce output at least until inventories began to fall.

Fixed interest issues by non-finance companies were subdued in July/August 1974; with financial conditions very tight lenders were showing a preference for shorter term claims. By October, however, the number of fixed interest issues by non-finance companies had increased substantially and interest rates on these had risen as high as 14/14.5 per cent compared with a top of 12 per cent three months earlier; these rates, mainly for terms between 2 and 7 years, remained current until January. Subsequently, borrowers typically lengthened their maximum term from 7/10 years to 15 years. Investor response to issues in the early months of 1975 was quite strong and interest rates, particularly at the shorter end, tended to drift downwards. By the close of the year rates ranged from 13 per cent for 4 year debentures to 13.75 per cent for 15 year debentures. However, borrowers were having more difficulty in filling issues and investor preference was again mainly for the shorter maturities.

There was also some increase in share raisings by non-finance companies in the first half of 1974/75 from the subdued levels of the corresponding period of the previous year. Although new money raised by non-finance companies fell to low levels in the March quarter 1975, there was a marked increase in announcements of new issues. Some companies may have wished to raise share capital during the year to improve their debt/equity ratio, sometimes to avoid breaching trust deeds. Share prices declined sharply in the September quarter 1974 to their lowest point since the end of 1962; high yields on other assets and low levels of confidence about future profitability would have contributed to this result. Of course, the low share prices made the raising of capital through new share issues costly and, where prices fell below par value, very difficult. During the remainder of 1974/75 share prices rose at the same time as there was a general easing in liquidity conditions. The Sydney index of ordinary share prices fell by 5 per cent over 1974/75 as a whole; there was a fall of 29 per cent in the September quarter and a net rise of 44 per cent over the following nine months.

Non-finance companies increased the level of their borrowings overseas in the first half of 1974/75 compared with net repayments in the first half of 1973/74. Their reliance on the banking system did not appear to increase; in the six months to January 1975, major trading bank advances to non-finance companies rose by substantially less than in the corresponding period of 1973/74. At the same time, non-finance companies increased their deposits (excluding certificates of deposit) with major trading banks by considerably more than in the first half of the previous year. These movements could well mask differences between the early and later months of the period. However, it is possible that non-finance companies obtained funds by reducing holdings of certificates of deposit; no industry classification of certificates of deposit is available but, in total, they fell sharply in the first half of 1974/75 after rising strongly in the comparable period of the previous year.

11 Major Trading Banks
SEASONALLY ADJUSTED

Within the corporate sector, activity on the inter-company market was generally light during the year. An increased preference for liquidity and security was reflected in a low level of term loans on that market and a substantially increased demand for bank bills.

Financial intermediaries

The banking system benefited from increased investor preference for security in 1974/75 and its share of total financing increased quite sharply. In their financing, banks were called upon not only to meet the essential needs of business for finance, including increased working capital associated with higher money values of stocks and debtors, but also to meet demands from borrowers, including some non-bank financial institutions, which would normally have obtained finance elsewhere in the capital market. Despite severe liquidity constraints they had experienced in the early part of the year and lingering uncertainty about liquidity prospects, banks responded quickly to requests by the authorities to raise their lending to meet these demands for finance.

Trading banks

There was an increase of 15 per cent in deposits held with major trading banks by private non-bank groups during 1974/75 compared with the 17 per cent increase recorded in the previous year. Although the percentage rise in total deposits during the latest year was only a little less than in 1973/74, there was a marked contrast between the two years in the composition of the increases recorded. In the year just ended, fixed deposits provided much of the growth in total deposits; they rose by $2,662 million after falling by $193 million in 1973/74. To some extent at least, these movements represented switching with certificates of deposit. The latter fell sharply in 1974/75 after accounting for all of the growth of deposits in the previous year. Current deposits fell in the early months of 1974/75 but subsequently rose and, for the year as a whole, increased by $506 million; in the previous year they had fallen by $178 million.

A fall in interest rates on certificates of deposit relative to fixed deposit rates, in the period between July 1974 and March 1975, in part explains the movement of funds between these two claims. Interest rates on certificates of deposit had reached very high levels late in 1973/74 as banks competed for scarce funds; in June 1974 the weighted average issue yield on certificates of deposit exceeded 17 per cent. In July the maximum rate on fixed deposits was raised to 10 per cent. As competition for funds became less severe and liquidity conditions eased, interest rates on certificates of deposit declined to just above the maximum rate on fixed deposits by late 1974. In the next few months rates on certificates of deposit fell further and by March averaged 9.3 per cent; they stayed close to this level for the remainder of the year. In a move away from carded rates five major trading banks in March reduced the rates they were offering for fixed deposits less than $50,000 from 9/9.5 per cent for various terms, to between 8 per cent and 9.5 per cent.

The liquidity of major trading banks fell very sharply in the closing months of 1973/74 and several banks needed to take Reserve Bank loans to maintain their LGS assets above the conventional minimum of 18 per cent; these loans reached a maximum level equal to some 3 per cent of aggregate bank deposits in late July. The banks' liquidity remained under pressure during the September quarter of 1974. Steps taken to ease the liquidity drain and later to raise liquidity levels were detailed earlier in the Report. The liquidity position of the banks began to ease in the December quarter of 1974; the banks had repaid outstanding loans to the Reserve Bank early in that quarter, and although there was a slight fall in the LGS ratio in December, it was generally rising until April. During the seasonal rundown in the final quarter of the year the fall in the ratio was not as sharp as usual. Banks ended the year with an average LGS ratio of 26.2 per cent, much higher than the level of 19.2 per cent in June 1974. The action indicated earlier to raise the SRD ratio, together with early repayment of loans outstanding under the special facility, added up to a drawing-off of funds amounting to 2.8 per cent of deposits over the first five weeks of 1975/76.

In the last few months of 1973/74, with liquidity falling and official policy requiring restraint on lending, new and increased lending commitments of the major trading banks were at low and declining levels. Further falls in new lending were recorded in the three months to mid October 1974. Over the next few months measures taken to ease the banks' liquidity situation and encourage lending contributed to a sharp increase in their lending commitments. The acceleration of growth in deposits facilitated a strong expansion in new lending which, by mid March, was in excess of rates recorded in the previous year and, in money terms, close to the peak rates of 1972/73. In mid March the Reserve Bank informed trading banks that lending policy would not envisage further expansion in the aggregate provision of new finance by trading banks beyond levels recently recorded. The aim was that lending should be adequate to support recovery in economic activity without being too accommodating to inflationary demands. Largely because of administrative lags, including negotiations in train, the growth in new lending continued for some time but new approvals were falling at the close of the year. The bulk of the increase in new lending commitments since October came from overdraft approvals but rises in term and farm development loan approvals also made modest contributions. Overdraft approvals rose strongly for all major categories of borrowers during this period, but the increase for the manufacturing group was the most marked.

The banks' Term and Farm Development Loan Fund Accounts were replenished in July/August 1974 by $73 million and $36 million respectively; in accordance with past practice, two-thirds of this amount came from SRD accounts and the remainder from other assets of the banks. A further replenishment of Term and Farm Development Loan Funds was announced in July 1975; the Funds received a total of $82 million of which $55 million came from a reduction of 0.4 percentage points in the SRD ratio.

Cancellations and reductions of overdraft limits declined in the early months of 1974/75. Nevertheless they were in excess of new overdraft approvals and overdraft limits outstanding fell. Subsequently, approvals rose faster than cancellations and reductions and limits outstanding rose over the final months of 1974; this trend strengthened during the six months to June 1975. Although limits outstanding were rising strongly by December, overdraft advances outstanding remained sluggish during 1974/75, with the exception of a sharp rise in May probably associated with the changed tax pattern during the year; usage of overdraft limits fell considerably from the high levels reached in September. For the year as a whole, total loans, advances and bills discounted rose by 9 per cent compared with a rise of 30 per cent in the previous year. Nearly all of this increase was accounted for by a sharp increase in banks' holdings of bills discounted.

Rapid expansion of bill financing by banks was a feature of the year. This traditional form of banking business has experienced a renaissance in recent years. When banks were asked in March not to expand further their aggregate provision of new finance, the request was designed to include their financing through bills. During 1974/75 there was a substantial growth in the establishment of bill facilities under which banks accept or endorse bills drawn by their customers up to an agreed limit; while these facilities did not commit banks to the provision of funds by discounting bills, they helped customers to raise funds in financial markets. Acceptance/endorsement limits outstanding of all banks rose from about $1,500 million in early July 1974 to about $2,300 million a year later; bills outstanding against these limits rose from about $900 million to about $1,500 million. There was a particularly rapid growth in the December quarter when investors sought the greater security attaching to bank-accepted/endorsed bills following the disturbances in financial markets in October. Bill financing also provided flexibility in the ways banks could finance the particular credit needs of their customers at a time of uncertain liquidity prospects. Banks also may enter commitments to provide funds by discounting bills up to an agreed limit; these commitments did not vary much over the year. In early July 1975 they totalled $466 million; bills outstanding against these limits were $254 million. As mentioned earlier, banks' holdings of bills discounted also rose sharply during 1974/75. The bulk of these holdings represented bank-accepted bills bought in the market as part of funds management.

Farm loans outstanding rose slowly throughout 1974/75 and recorded a much smaller increase than in 1973/74. Term loans outstanding grew slowly in the first half of 1974/75, and, although they accelerated later in the year, the increase for the year as a whole was somewhat lower than that in the previous year.

Following the sharp general rise in market interest rates late in 1973/74, the maximum overdraft rate on advances drawn under limits of less than $50,000 was raised from 9.5 per cent to 11.5 per cent per annum in July. Rates on larger advances, which are not subject to maximum limitations, generally rose more sharply over this period. Other trading bank rates were also adjusted in July. Although during the rest of 1974/75 there were no further changes in official maximum rates, the five major trading banks that reduced deposit interest rates in March also announced reductions in interest rates on advances of less than $50,000. Generally rates on these advances were reduced by 0.5 percentage points, although one bank limited its reduction to 0.25 percentage points.

Trading banks other than the major trading banks experienced strong growth in deposits from the private non-bank sector during 1974/75; these deposits rose at about the same pace as in the previous year and at a faster rate than those of the major trading banks. Although loans and advances by these banks rose somewhat less rapidly than they had in 1973/74, they increased at a much quicker pace than loans and advances of the major trading banks.

Savings banks

The growth of savings bank deposits had slowed over the latter stages of 1973/74, culminating in an exceptionally large fall in deposits in July. As a result of the financial tightness at that time, high interest rates were offered on competing claims and this no doubt contributed to the loss of funds by the savings banks.

12 Savings Banks
SEASONALLY ADJUSTED

The maximum rate on savings bank deposits was raised from 7 per cent to 9 per cent in July; rates offered by banks on investment accounts/deposit stock increased accordingly but ordinary account rates were generally left unchanged. Subsequently, deposits grew strongly, particularly in October when investors apparently sought greater security at a time of disturbance in financial markets. In March, most savings banks announced reductions, mostly of 1 percentage point, in the interest rate on investment accounts/deposit stock. The growth of savings bank deposits slowed in March and April but increased again over the final months of the year.

For 1974/75 as a whole savings bank deposits rose by 14 per cent compared with a rise of 9 per cent in 1973/74. Growth was confined to investment accounts and deposit stock; they rose by a remarkable 98 per cent. Other accounts fell by 4 per cent during the year. These divergent movements went with a widening interest rate differential between the two claims, especially in the period between July and March.

In response to movements in deposits and earlier action designed to ease the over-stretched position of the housing industry, savings bank housing loan approvals continued to fall in the September quarter of 1974/75, when they reached their lowest rate for two years. Towards the end of that quarter, in the light of lessened activity and diminished pressure on resources, steps were taken to increase the ability of savings banks to lend for housing. The Banking (Savings Banks) Regulations were amended in September to reduce from 60 per cent to 50 per cent the proportion of depositors' balances that savings banks subject to the Banking Act are required to hold in prescribed liquid assets and public securities and to reduce from 10 per cent to 7.5 per cent the proportion of deposits which they are required to hold in deposits with the Reserve Bank or Treasury notes. At the same time, the Reserve Bank asked savings banks to increase, if practicable, the volume of their finance approvals for housing. Later, the authorities acted to bring about a substantial short-term increase in housing loan approvals by savings banks. In November the Reserve Bank informed them that it would be helpful if they could further raise their new lending in the three or four months immediately ahead by bringing forward some part of the loans which they would otherwise have been planning to make in the June and September quarters of 1975. In December the Government enacted legislation which allowed it to advance $150 million to banks (mainly savings banks) for on-lending for housing.

Aided by very strong growth in deposits, savings banks responded quickly to these initiatives. Their approvals for finance for housing doubled in the December quarter and rose by a further 45 per cent in the March quarter to a record level. By the end of March the Government allocation had been fully committed.

Commitment of the Government advance meant that some moderation in total savings bank lending for housing was probable in the June quarter. In view of the improvement which had occurred in the outlook for availability of institutional finance for housing, such a prospect did not give cause for concern and in April the Reserve Bank wrote to the savings banks indicating that they should not seek to offset this moderation by increasing lending from their own resources. In the event, savings bank housing loan approvals fell in the June quarter but were still at a high level. For 1974/75 housing loan approvals by savings banks were 51 per cent above those in the previous year.

As reported last year, maximum interest rates on savings bank loans of less than $50,000 were raised to 11.5 per cent in July, subject to a maximum increase of 2 percentage points in any loan or class of loan. During March most savings banks announced reductions in their lending rates of from 0.25 to 0.50 percentage points.

Other banks

Demand for loans from the Australian Resources Development Bank increased substantially during 1974/75 and approvals were about 45 per cent larger than in 1973/74. These approvals were not fully drawn and the level of undrawn commitments rose considerably. In March 1975 the bank borrowed US$30 million in the Euro-bond market to supplement its domestic raisings; this was the bank's first venture into the overseas bond market.

The Commonwealth Development Bank increased its lending in the second half of 1974/75 after a fall earlier in the year. Late in 1974 the Government had announced that $20 million would be advanced to the bank to allow it to broaden its lending to the cattle industry, which had been severely affected by the sharp decline in cattle prices.

Other intermediaries

During the year the Bank continued its consultations with representatives of non-bank financial institutions. The relationship built up over the years with these bodies has proved very helpful to the Bank in interpreting, assessing and responding to substantial changes in the financial sector.

Under the Financial Corporations Act 1974 over 900 corporations have submitted registration material to the Bank and initial statistical forms, giving a basis for the classification of the registered corporations, have also been received. Regular statistical collections are being developed and an early further step under the Act is for the Treasurer to appoint Advisory Committees.

Financial and economic conditions in 1974/75 presented many difficulties to non-bank financial intermediaries as well as to the banks. From late in 1973/74, the non-bank intermediaries faced sharply higher costs of borrowing funds, which, in some cases, they needed to finance commitments entered into at a time of lower interest rates. Cash flow of some financial corporations suffered as a result of the inability of some borrowers, particularly in the property field, to achieve a sufficient return from projects to service fully their loans. Funds difficulties for some corporations, particularly amongst finance companies and building societies, became acute in October 1974 following the failure of a major company engaged principally in property development. To finance withdrawals of funds and to meet continuing commitments, the corporations concerned had substantial recourse to the Australian banking system and/or to foreign sources of funds, often provided by affiliated corporations. Many other financial corporations increased their standby facilities in Australia and overseas as a precautionary measure. The strain on liquidity at that time led to a sharp acceleration of the decline in lending by financial corporations and, in some cases, lending dropped to a very low level.

The intake of funds by financial corporations began to increase as the December quarter progressed, and borrowing conditions grew easier during the first half of 1975. Much of the increased borrowing went to restore liquidity positions and financial corporations followed a cautious approach in their funds management. As levels of liquidity increased during the second half of the financial year, financial corporations raised their new financing, in some cases appreciably. At the close of the year these intermediaries were generally in a relatively comfortable liquidity position. However, in line with general trends over the financial system, the maturity structure of their liabilities had shortened appreciably and cash flow was still weak in some areas of financing.

Outstanding borrowings of finance companies showed very modest growth during 1974/75. The proportion of funds obtained in short-dated maturities was high compared with earlier years. Within borrowings, debenture raisings by listed finance companies dropped considerably in the first half of 1974/75. The disclosure of financial difficulties of some property developers with substantial borrowings from finance companies affected finance companies' ability to borrow, particularly in the December quarter. Interest rates on debentures, which were up to 13 per cent by the June quarter 1974 rose to as high as 14 per cent over the last few months of 1974. There was a slight easing in rates at the short end in the early months of 1975. By the end of the year rates offered on one and two year debentures ranged from 11 per cent to 13 per cent compared with rates of between 11 and 14 per cent around the middle of 1974/75. Rates on five year debentures were between 11.5 per cent and 14 per cent at the end of the year; between December and March they had ranged from 12 to 14 per cent.

As the availability to them of borrowed funds contracted, finance companies reduced the amount of new finance they provided, especially to property developers. Repayments also fell a little but the decline in new finance was steeper and there was a sharp fall in the growth in balances outstanding in the first few months of 1974/75. During December balances outstanding actually fell and there was little growth over the remainder of the year. The increase in balances outstanding over 1974/75 appears to have been only about 3 per cent compared with an increase of 38 per cent in 1973/74.

Permanent building societies increased their borrowing and lending interest rates in June/July 1974. Immediately prior to these increases, the tight financial conditions exacerbated the seasonal downturn in their intake of borrowed funds, and in fact there was a fairly substantial net outflow. During the September quarter net inflow of borrowed funds was quite buoyant, again in part due to seasonal influences, but also presumably in reflection of the interest rate increases of June/July. The upturn in their borrowings was arrested in early October, when the disturbances in financial markets mentioned earlier were associated with a very large net outflow of funds within a few days. Following firm action by the Bank to raise public and banking liquidity, together with assurances that trading banks had agreed to consider sympathetically requests for finance from soundly managed financial institutions with adequate asset backing, the loss of funds abated; the net intake of funds resumed quite strongly in following months and in March, with some easing in interest rates generally occurring, most societies in New South Wales and Victoria reduced their borrowing and lending rates. Net intake of funds by societies continued at buoyant levels over the final months of 1974/75, allowing for seasonal fluctuations. In total, net intake was about 12 per cent higher in 1974/75 than in the previous year.

Loan approvals by permanent building societies were at very low and declining levels in the first half of 1974/75; subdued levels of lending in the first quarter of the year were in line with borrowing experience in preceding months. The loss of funds in October led to a further reduction in lending as societies sought to restore their liquidity positions. Lending did not begin to expand again until February, but over the last few months of the year was growing strongly; the rate of lending in these months equalled the peak levels of 1972/73. Overall, approvals were about 5 per cent lower in 1974/75 than in the previous year.

13 Non-bank Financing
SEASONALLY ADJUSTED QUARTERLY

Loans to authorised dealers in the short term money market had fallen in the tight liquidity conditions in the final months of 1973/74 and in June 1974 were at their lowest level for eight years. Dealers could no longer see a margin of profit between the return on their portfolios and the cost of funds, and had preferred to reduce their books. The level of clients' loans rose fairly steadily over the first six months of 1974/75; this trend continued in the second half of the year until early May 1975, when the seasonal liquidity rundown associated with tax payments caused some reduction in the level of loans. Despite the overall higher level of loans from clients, most dealers operated well below their borrowing limits. These limits, which are set by a gearing ratio, were increased sharply in January 1975 in response to an improvement in portfolio values over the previous six months. The weighted average interest rate on loans from clients eased after August 1974 (when it reached the all-time high of 9.5 per cent) and in the next nine months fluctuated between 6.0 per cent and 8.5 per cent.

Dealers expanded their portfolios by about $300 million over the year, compared with a fall of around $400 million in 1973/74. Dealers continued to hold the great bulk of their portfolios in short-term Australian Government securities; the proportion of dealers' portfolios held in private paper—mainly bank bills and certificates of deposit—declined during the year.

General financial stringency reflected in a rise in the cost of borrowed funds to merchant banks and contributed to a steadying in the volume of their financing in the six months to September 1974.

They subsequently benefited from the monetary expansion which began in the December quarter; costs of borrowing fell, partly due to a shortening in maturity structure of their liabilities in line with the general shift in investor preferences.

The number of new policies issued by life insurance companies fell further during 1974/75, while there was a rise in the number of policies discontinued and reduced. Nevertheless, premiums payable on policies grew at about the same pace as in the previous year. These developments reflected the effects of inflation in increasing average premiums but reducing the attractiveness of these long-term claims, the effects of general financial tightness and some reduction of returns arising out of changes in taxation arrangements for life offices.

Lending from life offices was at a high level early in 1974/75 but fell somewhat later in the year; for the year as a whole the growth in loans outstanding was about the same as in the previous twelve months. The growth in lending and the call on funds for other existing and new commitments placed the liquidity position of life insurance companies under some pressure in the opening months of the year. As with other financiers their position improved as the year progressed. Early in 1974/75 the proportion of total assets of life offices accounted for by loans rose slightly, in contrast to a declining trend over previous years; however, later in the financial year the downward trend in this proportion was resumed. The proportion of assets held as property continued to rise over the year.

There was only a slight expansion in the assets and liabilities of pastoral finance companies during 1974/75, after moderate growth in the previous year. Rural advances outstanding of this group declined steadily from the beginning of 1974/75, in contrast to the strong growth in 1973/74. Holdings of short-term liquid assets increased and the monetary value of stocks held by pastoral finance companies rose during the year. Overall, the larger pastoral finance companies continued to diversify their operations during the year.

Demand and Supplies

Aggregate spending in real terms fell short of available supplies during much of 1974/75. Demand declined during the first half of the year but began a subdued recovery during the second half of 1974/75. Public spending grew at a rapid rate throughout the year. Private spending, on the other hand, fell in the first half of 1974/75 and registered only a small increase over the remainder of the year. Despite a sharp fall in the arrival of goods from overseas after the September quarter 1974, excess capacity in the domestic economy rose for the greater part of the year.

Demand

Final demand rose by about 2 per cent in real terms during 1974/75 after a rise of close to 6 per cent in the previous year; within the year, final demand remained static in the six months to December 1974 but grew at a strengthening rate over the remainder of the year. A build-up of inventories in the first half of the year was followed by a run-down over the final six months. During 1974/75 as a whole, some offset to the fall in domestic demand was provided by a strong rise in the volume of Australian exports; this reflected, in part, the easing of supply constraints in Australia and the delivery of orders placed in more buoyant times.

Business fixed investment fell by about 5 per cent in 1974/75, providing cause for serious concern; the drop in investment in the year just ended was the third annual decline in the last four years. A strong rise in business investment had occurred in the first half of 1973/74 but there was little change in investment spending in the second half of that year. Investment fell significantly in the first half of 1974/75 and appears to have remained low in the second half of the year. For the year as a whole the heavier decline was in outlays on non-dwelling building and construction. Surveys of business anticipations suggest an acceleration in the rate of decline of outlays on both non-dwelling building and construction and plant and equipment in the first half of 1975/76. Investment in the mining and associated processing groups showed a strong rise during 1974/75; there was a small fall in investment in manufacturing industry (excluding mining-based activities) while investment in non-manufacturing industry, apart from mining, fell sharply.

14 Spending
1966/67 PRICES – SEASONALLY ADJUSTED HALF-YEARLY PERCENTAGE CHANGES

Many factors contributed to the drop in investment during 1974/75. Falling levels of aggregate demand played a major role; this reaction is usual in cyclical downturns but as the fall in demand during 1974/75 was particularly severe the discouragement to investment spending was pronounced. During 1974/75, companies experienced a severe squeeze on profits and this was a further crucial factor in the fall in investment spending; the decline in profits faced companies with serious problems in financing stocks and investments to which they were already committed, leaving little scope for new investment projects. Early in the year, with financial conditions very tight, outside funds remained expensive and difficult to obtain. Finally, continued high levels of inflation contributed to the drop in investment by making the planning of projects extremely difficult, hampering the operation of long-term capital markets and generally adding to uncertainty and undermining business confidence. On the other hand, investment was presumably to some extent encouraged by the accelerated depreciation allowances introduced towards the end of 1974.

A substantial build-up of non-farm stocks occurred in the first half of 1974/75 continuing the pattern of the final six months of the previous year. The rise in stock holdings in early 1974/75 appeared to be involuntary, reflecting a level of demand lower than enterprises had anticipated; a large part of the increase probably came from the delivery of imports ordered when demand was at a higher level. In contrast to the first half of the year, holdings of non-farm stocks fell by a sizeable amount over the six months to June 1975, as production and rates of importing were adjusted and the slight recovery in aggregate demand was met, in part, from inventories. Farm stocks rose further in 1974/75; the increase was similar to that in the previous year. Much of the build-up in the latest year was due to purchases by the Wool Corporation.

Private spending on dwellings fell sharply during 1974/75; however, unlike other components of private investment, there were signs at the end of the year that a recovery in spending was close at hand. Finance approvals by major institutional lenders were falling over the closing months of 1973/74 and recorded a further sharp drop in the September quarter 1974. As a result of various initiatives taken by the authorities to boost savings bank lending for housing (see pages 29 and 30) and, more generally, an easing in the previously tight liquidity situation, lending approvals rose steeply over the remaining three quarters of the year. Although price rises were rapid and there was, for a time, an increase in the proportion of finance approvals devoted to used housing, a substantial rise in the number of finance approvals for new houses occurred between September 1974 and June 1975. Reflecting trends in finance before September, local government approvals and private commencements fell sharply during the first half of 1974/75. Although spending had been sustained to some extent by work in the pipeline, it also fell heavily in this period. However, both private commencements and local government approvals rose in the March quarter, responding to the upturn in finance approvals, and appear to have advanced further during the final three months of the year. An increase in the volume of work done lagged behind the rise in commencements; spending fell further in the March quarter and seems to have remained subdued over the final three months of the year.

15 Composition of Private Spending
1966/67 PRICES – SEASONALLY ADJUSTED HALF-YEARLY PERCENTAGE CHANGES

Private consumption showed little change during the first half of 1974/75 but, in response to fiscal policy measures and an easing in monetary conditions, grew firmly over the second half of the year. Despite reductions in tax rates announced in the Budget and in November, there was only a moderate rise in real household disposable incomes during the year; this slower rate of growth was largely attributable to a fall in farm income. In the early months of the year consumption seemed to be depressed by tight financial conditions and a general uncertainty associated with continuing rapid inflation and steeply rising unemployment. Spending on household durables fell while spending on non-durables remained static. Outlays on motor vehicles at first held up well but towards the end of 1974 registrations of new cars and station wagons began to fall rapidly. This trend was reversed when the Government announced a temporary reduction in sales tax in late January; registrations jumped sharply in February and peaked at a record level in April. Over May/June registrations fell as the sales tax rate began a phased reversion to its earlier level. Reductions in PAYE income tax instalments announced in November became effective on 1 January and with this, as well as the increased availability of finance and the stimulus given to vehicle sales, private consumption lifted as 1974/75 progressed. Outlays on household durables seem to have recovered strongly over the final six months of 1974/75 and spending on non-durables rose firmly. Overall, private consumption spending seems to have risen by about 3 per cent during 1974/75, after rises of about 5.5 and 6 per cent in the two previous years.

Australian Government Budget outlays rose by 46 per cent in current price terms during 1974/75; this compared with an increase of 32 per cent originally provided for in the Budget and a rise of 20 per cent in 1973/74. In the year just ended the most rapid increases in outlays were in the areas of education, urban and regional development, housing and assistance to industry. Within the total increase, spending on goods and services rose by 33 per cent, transfers by 41 per cent and net advances by 108 per cent. Payments to persons increased by 38 per cent and, taking transfers and advances together, payments to the states and local governments rose by 52 per cent.

With the increase in funds available from the Australian Government, there was a rapid acceleration in real spending on goods and services by state and local government authorities during 1974/75. Consumption spending by these authorities recorded the faster increase but capital spending also rose strongly. Real spending by Australian Government authorities rose only slightly during the year; capital spending by this group rose but consumption spending appears to have been lower than in the previous year. After excluding spending on aircraft, which boosted 1973/74 figures, consumption spending remained fairly steady. Overall government spending, both current and capital, rose very quickly during 1974/75. Given trends in private spending, this reflected in a substantial increase in the government share of gross domestic product in 1974/75.

Exports of goods and services rose by about 7 per cent in volume terms during 1974/75, after falling by about 4 per cent in the previous year. Exports of both rural and non-rural goods appear to have risen moderately while services rose at quite a fast pace. A more detailed account of trends in exports can be found on pages 16 and 17.

Supplies

Total available supplies declined some-what during 1974/75, after an above average increase in the previous twelve months. The fall was more than accounted for by a drop in non-farm output. Farm output rose by a small amount and, for the year as a whole, there was a small rise in the volume of imports of goods and services. Within the year, a fall in domestic output in the first half of the year offset a strong rise in imports; although local production may have increased a little during the latter part of the year, this was more than offset by a sharp fall in the volume of imports.

With demand falling in real terms, real gross domestic product seems to have declined by close to 2 per cent during 1974/75; the only other fall in gross product recorded in the post-war period was a 0.9 per cent drop in 1952/53. Real non-farm production apparently fell by a little over 2 per cent in the year just ended. The decline, however, was most pronounced in the first half of the year when a fall of over 7 per cent (at an annual rate) was observed. In the final months of the year domestic output appears to have begun to rise again; a major factor was a lessening in competition from imports.

Industrial production as measured by the ANZ Bank index fell sharply over the eleven months to May 1975 to a level which, on preliminary figures, was 12 per cent below that at the beginning of 1974/75. The fall in industrial output over the year as a whole was sharper for non-durables than for durable goods. Amongs non-durable goods particularly heavy falls were recorded by “chemicals and allied industries”, “textiles, clothing and footwear” and the “miscellaneous” category. In the durable group, “furniture and household goods” and “building and construction materials” sustained the heaviest falls. Domestic sales of many non-ferrous metals declined sharply. In contrast to the experience of most other industries, production in the mining industry seems to have increased during 1974/75. The output of the building and construction industries experienced a steep fall in 1974/75; activity was depressed in both housing and other building and construction.

Gross domestic farm product seems to have risen by around 2 per cent during 1974/75. A rise in pastoral production owed a good deal to a sizeable rise in wool output, the first increase for five years; this was the result of a rise in sheep numbers following the high prices of 1973 and an increase in average fleece weights. With high stock numbers and a rise in average carcass weight, meat production also rose during the year. Agricultural production showed little change during the year. Wheat output declined a little as less favourable seasonal conditions resulted in reduced plantings and slightly lower yields. On the other hand, conditions were favourable in sugar growing regions and, combined with the incentive provided by high prices, resulted in a strong increase in sugar production.

Imports of goods and services showed only a small rise during 1974/75, whereas in the previous year they accounted for about half of an exceptionally large increase in supplies. Moreover, as pointed out earlier in this Report (page 17), annual figures obscure an abrupt turnaround in trends in imports during the latest year. In the early months of 1974/75 imports added to supplies, due to the arrival of goods ordered when activity was at a higher level. After the September quarter, however, the volume of imports began a steep decline; this was a consequence of falling levels of domestic demand, the change in relative prices that resulted from the 12 per cent devaluation of the Australian dollar on 25 September and the introduction of quotas and increased tariffs on some items.

Labour Market

The demand for labour declined sharply during much of 1974/75. At the same time, the supply of labour rose at a pace somewhat slower than that recorded in the previous year. Overall, there was an unusually large rise in unemployment during 1974/75.

The previously reported fall in production during the year resulted in a fall in both output per worker and in numbers employed. In the longer term, output per worker will respond to changes in technology, the amount of capital per worker and training of the workforce. During cyclical swings, however, these forces tend to be swamped by changes in the intensity of work and in the number of hours worked. In 1974/75, available evidence indicates that falls in hours of work contributed to a decline in output per worker. Overtime working fell sharply and short-time working increased over the first three quarters of 1974/75; despite the probability of an offset from a reduction in absenteeism and the number of hours lost through strikes, a decline in the average number of hours worked almost certainly occurred.

The reduction in the demand for labour was evident in a drop in the numbers in civilian employment during 1974/75. Except for February 1975, numbers employed fell in each of the first nine months of 1974/75; although there was a firm rise in April/May, civilian employment at the end of the year was about 1 per cent below its June 1974 level. Over 1973/74 there had been a strong rise of 4.7 per cent. In line with movements in shares of national output, employment in the private sector declined at an even more rapid rate in 1974/75 (about 4 per cent) than employment as a whole, while government employment rose strongly (by about 8 per cent). Within the government sector, the fastest increase was in employment by local government; these figures included most of those employed under the Regional Employment Development (RED) scheme. The fall in employment during the year was faster for females than for males; in the previous year the rate of increase in the employment of females was 2.5 times as fast as the increase for males. This turnaround perhaps reflected the more rapid rise in the wages of females, brought about by the phasing in of equal pay and the marked impact of import competition in industries which employ a large number of females. Amongst broad industry groups, easily the steepest drop in employment occurred in manufacturing. Employment in building and construction industries also fell quickly in the seven months to January, but grew firmly over remaining months of the year, probably mainly because of RED scheme employment. Amongst service industries, there was a slight drop in the commerce, communication, finance and property groups. In total, employment in tertiary industries increased only slightly over the year, after two years of strong growth.

16 Unemployment Rate
SEASONALLY ADJUSTED QUARTERLY AVERAGES

Net migration during 1974/75 seems to have been below the 73,000 of the previous year. With migration down, the population of working age (15–64) probably increased at a rate slightly slower than the 1.9 per cent rise of the previous year. The population as a whole appears to have increased at the lower rate of 1.3 per cent in 1974/75; effects from the age composition of the population and a fall in birth rates account for this slower rate. Depressed conditions in the labour market appear to have resulted in a slight fall in the proportion of the working age population offering themselves for work during 1974/75; there was only a small rise in the rate of participation of females in the workforce after strong rises over recent years. Overall the growth in the labour force during 1974/75 was less than that recorded in the previous twelve months.

Unemployment rose at an unusually rapid rate over 1974/75. From 85,100 at June 1974, registered unemployed applicants rose to 235,000 in December 1974. There was a somewhat slower rate of increase over the three months to March, when unemployment reached 267,800. After rising to 281,100 in April unemployment declined during May and remained fairly steady in June. Over the six months to June employment under the RED scheme rose by 27,400. Nevertheless by end June 1975 the number of unemployed applicants stood at 270,200. This represented 4.5 per cent of the labour force; the peak of 4.7 per cent in April was the highest unemployment rate recorded in the postwar period.

The rise in unemployment over the year was fairly evenly spread between adults and juniors but was proportionately larger for metropolitan than for country areas; the concentration of employment under the RED scheme in country areas may have been important for the latter comparison. Amongst occupational groups the rise was widespread; the largest contributions to the overall increase came from the semi-skilled and unskilled group and from clerical and administrative occupations. The total number of unemployed applicants at the end of the year included 7,200 registered as unemployed due to structural change caused by government policies, compared with 2,500 in the same category in July 1974 and a peak of 23,100 in January 1975.

Some 3,600 people were obtaining assistance under the Structural Adjustment Scheme in June 1975 compared with about 800 at the start of the year; the bulk of those being helped under the scheme would have been registered as unemployed while they were receiving assistance.

The rise in unemployment over 1974/75 occurred despite the large numbers covered by various government support schemes. The RED scheme began to employ people in October and by June 1975, 29,800 people held jobs under the scheme. A further 7,600 were employed by State Governments under the Special Employment Grants Scheme initiated at the February 1975 Premiers' Conference. For comparison, the superseded unemployment relief schemes employed 24,700 people at their peak in May 1973. The national employment and training system also began in October and by June, 14,100 people were receiving training; not all of these were necessarily unemployed before they commenced training.

Movements in vacancies also evidenced the weakness in the demand for labour during much of 1974/75; they fell from 73,300 in June 1974 to 36,200 in December 1974. Over the remaining months of 1974/75 vacancies declined at a slower pace; at June 1975 they stood at 29,900.

Incomes and Prices

Total incomes, as measured by gross domestic product at current prices, appear to have risen by close to 16 per cent in 1974/75, compared with a rise of 21 per cent in the previous year. The slower growth in 1974/75 reflected a fall in farm product at current prices after a rise in the previous year; non-farm gross domestic product rose by around 19 per cent, a similar increase to that in 1973/74. In the latest year the increase in income measured at current prices was more than fully accounted for by a rise in prices. The implied deflator for non-farm gross domestic product seems to have risen by around 22 per cent in the latest year, after an increase of 13 per cent in 1973/74.

Incomes

Wage payments rose at an exceptionally fast pace during 1974/75. A record increase in adult male average weekly earnings in the first quarter of the year reflected, in part, a $15 increase in the metal trades award in April 1974 and the May 1974 national wage case decision, which added over $4 to average award earnings. In adddition, the metal trades decision flowed on to other groups and even larger increases were granted in a significant number of important awards. With relativities changed by these developments the metal trades employees pressed for a reopening of their agreement and obtained a further increase of $9 towards the end of the September quarter; the new increase also flowed on to a number of other awards. These events provided a further boost to wages in the December quarter and, despite a sharp fall in overtime earnings, another strong increase in average weekly earnings was recorded. Thereafter, earnings rose somewhat less rapidly, partly due to the timing of and decisions in major wage cases (see below). For 1974/75 average weekly earnings per male unit rose by about 26 per cent compared with a rise of 16 per cent in the previous year and an average annual increase of less than 6 per cent during the ‘sixties.

In its decision in the 1975 national wage case the Conciliation and Arbitration Commission determined on a system of conditional wage indexation. An increase in award wages of 3.6 per cent, equal to the rise in the consumer price index in the March quarter, was granted from mid May. This increased average male award wages by close to $4. The continuation of indexation was made conditional on other wage increases being confined to changes in work value and “catch up” of community movements. The Commission plans to meet each quarter to consider adjusting award rates in line with price movements. A hearing to determine increases based on productivity will be conducted annually. During May the Commission postponed consideration of any further increase in the metal trades award until August. The adjustment of award wages for price increases could slow the recovery of profits from depressed levels unless there are very sharp cyclical gains in productivity, or a considerable compression of over-award payments. However, should productivity gains be applied solely or largely to wages, and employees successfully resist the relative erosion of over-award payments, then in the long term, the share of profits in incomes is likely to remain close to present low levels. While profits are so low it could prove difficult to regain previous levels of investment and employment.

17 Sector Incomes and Spending
PROPORTION OF GROSS DOMESTIC PRODUCT

Although the rate of increase of male award wages was very rapid during the year, it was easily surpassed by the growth in female wages; this was due to the phasing in of equal pay, completed in June 1975. Consequently, the increase in wages per employee was faster than that of male wages. Despite the depressed level of employment during the year the rise in average earnings per employee pushed the rate of growth in wages, salaries and supplements to about 29 per cent, compared with 22 per cent in 1973/74.

The gross operating surplus of unincorporated enterprises fell during 1974/75 after a rapid rise in the two previous years. The rate of growth of non-farm enterprises' operating surpluses slowed appreciably in the latest year due to the low levels of activity. However, the major reason for the change in the fortunes of unincorporated enterprises was an abrupt turnaround in farm incomes. As already reported, farm output increased slightly during 1974/75. Average returns, though, dropped by about 13 per cent, while costs rose strongly. Meat prices fell particularly rapidly, both in export markets and locally, as overseas demand fell and entry to some markets was restricted. Average auction returns from wool fell by about 30 per cent over 1974/75 as a whole; both increased supplies and reduced demand from overseas contributed. On the other hand, returns from sugar skyrocketed while wheat prices rose firmly; late in the year prices of both these commodities retreated from the high levels they had reached. Overall, farm incomes fell by more than 40 per cent.

In total, household incomes appear to have risen by about 22 per cent in 1974/75, a rate of increase slightly slower than in the previous year. Despite tax cuts during the year, personal income tax payable rose by around 35 per cent so that the rise in household disposable incomes was close to the 21 per cent increase in the previous year. The rise in consumption in current price terms was not as fast as that in disposable incomes. Consequently, savings rose strongly, and the overall surplus of the household sector showed a marked rise. As graph 17 shows, the proportion of national income received by the household sector rose strongly during the year while the proportion it spent directly also rose solidly.

The gross operating surplus of companies showed a sizeable decline during 1974/75. Although production also fell, profits per unit of output declined. The fall in company profits reflected a combination of large cost increases and depressed levels of economic activity. The operations of the Prices Justification Tribunal probably also contributed to reducing profitability, especially in the first half of the year. In addition, tax payments based on the more buoyant incomes of the previous year and methods of calculation of profits that make little allowance for inflation, reduced funds available to companies. The corporate sector share of national income declined sharply during the year. Despite a substantial increase in its net borrowing the share of income spent by the corporate sector also fell sharply (see graph 17).

The gross operating surplus of public enterprises showed a slight rise in 1974/75 after falling in the previous year. Substantial increases in state indirect tax rates contributed to a further rapid rise in indirect taxes during 1974/75. Taxes directly transferred from incomes of companies and persons, of course, provided the Government with its main source of revenue; income taxes rose by 35 per cent in 1974/75. Transfer payments from the government sector to other sectors also rose sharply. As illustrated in graph 17, the share of national income (after transfers) going to the government sector rose strongly during the year. As the deficit of the government sector also rose, government spending as a proportion of national income increased by a substantial amount.

Prices

Import prices rose much more rapidly than export prices during 1974/75, in contrast to the result in the previous year. In part, the experience of the most recent year was due to the devaluation of the Australian dollar in September; import prices jumped sharply in the December quarter but there were also strong increases in other quarters, reflecting the inflation experienced by our trading partners. Average export prices from rural goods rose much less rapidly than the particularly strong increases of the previous two years. On the other hand, the rate of growth of prices of non-rural goods accelerated significantly for the year as a whole.

With the terms of trade having moved against Australia, the prices of goods and services used domestically rose more rapidly than those for GDP as a whole. The national accounts deflator for gross national expenditure seems to have increased by about 20 per cent in 1974/75; the GDP deflator may have risen by about 18 per cent.

Despite low levels of demand and, possibly, a restraining effect from the operations of the Prices Justification Tribunal in the first half of the year, the rate of growth of prices of domestically-consumed goods accelerated in 1974/75. Although the quickening in the growth of import prices contributed to this result, by far the most important proximate cause was the strong growth in average earnings outlined in the previous section. With output per worker declining, the rise in labour costs per unit of output was, in fact, even more rapid than the increase in average earnings. However, some slowing in the rate of growth of prices was perceptible in the final quarter of the year. Graph 18 shows that, when compared with the same quarter a year ago, the rate of growth in non-food prices fell in the June quarter 1975; this was the first such fall since the December quarter 1972.

18 Labour Costs and Prices
PERCENTAGE CHANGE OVER SAME QUARTER OF PREVIOUS YEAR

The non-food section of the consumer price index rose by 21 per cent from the June quarter 1974 to the June quarter 1975. The rise over the previous twelve months had been 13 per cent. The increase in the latest year was fairly evenly spread between all major categories of the nonfood index. The overall movement in the index, however, was dampened by a relatively slow rate of growth in food prices. They increased by 7 per cent between the June quarters of 1974 and 1975, a rise much lower than the 18 per cent increase of the previous year. Movements in food prices over both 1974/75 and 1973/74 were strongly influenced by fluctuations in meat prices; meat has a weight of more than a third in the food group. Excluding meat, food prices rose by 17 per cent over 1974/75 and 15 per cent in the previous twelve months. In total, the consumer price index rose by 16.9 per cent over 1974/75, compared with a rise of 14.4 per cent over 1973/74.