Financial markets have provided an
exciting ride in the opening weeks of 2006. As we begin to contemplate the
likely shape of the rest of the year, what are the likely
themes?

Despite the occasional alarms and
excursions, especially centred on the Iran issue, it seems that the global
economy is set to continue strong overall growth. The US economy continues to perform strongly,
China has just released a
swag of strong numbers, Japan is going well and even the
Germans are said to be feeling bullish. Interest rates should be rising,
commodity prices are likely to remain strong (and may even spike upward from
current very high levels) and the Australian economy seems set to continue its
rather lop-sided growth, with resources, well run retailers and some service
sectors (eg investment banking) booming while many other sectors
struggle.

Alan Mitchell provides a nice
wrap-up (subscription only) of issues for the Australian economy in the AFR, with the theme that
(slightly) lower than expected inflation may keep cash interest rates from
rising. As he says: “… most economists expect the economy to gain momentum
over the year. Participants in the latest quarterly survey by The Australian
Financial Review predicted growth of about 3.5% in 2006.” But there are
clear signs of real shortages of skilled labour, and Henry’s bet still is on
overall economic strength leading to potential overheating that requires
monetary policy to be tightened.

Read on at Henry Thornton.