Reserve Bank Governor, Phil Lowe has again underlined the central bank’s more upbeat outlook for the Australian economy in comments to a Sydney business dinner last night, telling his audience that the Australian economy is “in reasonable shape”, with the ‘headwinds’ of the past expected to “blow themselves out”.
He said the bank’s central forecast is “for some pick-up in economic growth and for inflation to move gradually higher” over the next couple of years – jobs growth will be slow and perhaps quicken this year, house prices and household debt remain a concern, but the outlook for the economy has brightened considerably.
In fact his comments were the second time this week he has revealed the change in outlook by the RBA, with its belief that economic growth is going to grow after the surprise 0.5% contraction in GDP in the three months to September. He revealed the more confident outlook in his statement after the RBA’s first board meeting of the year on Tuesday.
And the more positive view will be underlined for a third time later today in the RBA’s first Statement on Monetary Policy for the year to be released at 11.30am.
While he said the RBA’s forecasts “for 2017 and 2018, these forecasts will show little change from our earlier forecasts”, its the tenor of his comments on Tuesday, last night and those expected later today that shows the bank’s increased confidence about the outlook.
As he said on Tuesday, the RBA sees Australian “GDP growth to be around the 3 per cent mark over 2017 and 2018.” And he added in last night’s speech "In both years it will be boosted by a significant pick-up in LNG production. And the headwinds that we have been experiencing from the unwinding of the biggest mining investment boom in a century will blow themselves out.” (a significant change in attitude).
"Indeed, we are already around 90 per cent of the way through the fall from the peak to expected trough in mining investment. Another headwind we have had over recent years – that is the decline in our terms of trade – has already stopped.
"Since earlier last year, a rise in global commodity prices has provided a boost to our national income. And the improvement in the global economy since late last year should also help us.
"So, with the end of the unwinding of the mining investment boom in sight, the economy is in reasonable shape. Unexpectedly, GDP did fall in the September quarter last year, but this largely reflected a confluence of temporary factors. We expect that in the December quarter, the economy returned to reasonable growth,“ Dr Lowe said.
Dr Lowe said that the fall in inflation has ended, but remains well short of the bank’s 2% to 3% target range (1.5% in 2016). "Importantly, inflation is not expected to fall further. Instead, our central forecast is for underlying inflation to gradually rise over the next couple of years, and for headline inflation to increase a bit more quickly, boosted by increases in oil and tobacco prices.”
And then there are the negatives, and from the emphasis given in the speech last night, it is housing and household debt.
"We continue to pay close attention to the housing market and to household balance sheets. The picture varies widely across the country. Prices for houses in Sydney and Melbourne are rising strongly, but apartment prices in some cities, including Perth and Brisbane have fallen.
"The population is growing strongly, but there is a large number of additional dwellings to come onto the overall market this year. Growth in rents is weak, but vacancy rates in most markets are not unusually high. And investor demand looks to have strengthened in the closing months of 2016. So it is a complex picture.
"One reason for trying to understand this complex picture is that the level of household debt is relatively high. Overall, households are coping reasonably well with this. But there are clearly risks.
"So it is a positive development that over the past couple of years, banks have tightened their lending standards in some areas. This tightening was partly prompted by the supervisory measures put in place by the prudential regulator, APRA, and the Reserve Bank and APRA continue to work closely together monitoring developments.”
And the slow growing labour market and jobs continue to be watched closely.
"Another issue that we are paying close attention to is developments in the labour market. Employment growth slowed over 2016 and the growth that did take place was almost entirely in part-time employment. As is the case with the housing market, conditions vary across the country.
"Looking forward, the number of job vacancies and job ads suggest that some strengthening in employment growth might be in prospect. Our central forecast though is for the unemployment rate to remain close to its current level for some time to come.”
