A speech yesterday from a senior Reserve Bank official should change the tenor of the economic debate to a more positive, and in doing so, end the prospects of any further interest rate cuts.
Everyone else should read the speech from the Reserve Bank’s head of economics, Christopher Kent. It is perhaps the most positive commentary from the bank about the current state and immediate outlook for the economy, for quite some time.
Entitled ”After The Boom”, Dr Kent looked at the performance of the Australian economy before, during and after the great mining boom, and the central bank’s performance in forecasting some of the dramatic changes.
Coming after solid data from the Chinese economy in the past week on trade, inflation, retail sales, investment and production, yesterday’s speech adds to the feeling that the outlook for the economy has improved noticeably – and enough to end interest rate cut talk.
Yesterday’s business confidence and conditions survey from the National Australia Bank also added to that feeling, revealing the economy continues to do well, but with the hint of a small slowing.
“The business confidence index rose slightly to +6 index points in August (from +4), which is consistent with the long-run average for the series,“ the NAB said yesterday.
"On the other hand, business conditions (an aggregation of trading conditions (sales), profitability and employment) dropped back slightly in the month to +7 index points (from +9), but this is still well above the long run average of +5.
"Both trading conditions and profitability have continued to ease from their previously very high levels. In contrast, the employment component has managed to hold onto the gains seen in recent months, although it remains the weakest of the three components.
According to Alan Oster, NAB’s Chief Economist, “the recent downward trend in business conditions suggests that the non-mining recovery may have lost some vigour, but headline results from the survey still suggest these segments are performing well”. But Dr Kent’s speech signalled a change in emphasis about the economy from the central bank. It was as though the RBA had re-examined the recent data flow, including last week’s National Accounts for the June quarter and concouded things were a bit better than previously believed.
The final paragraph of his speech reveals the bank in upbeat mode, for a central bank, of course:
"If commodity prices were to stabilise around current levels, that would be a marked change from recent years. Also, the end of the fall in mining investment is coming into view. The abatement of those two substantial headwinds suggests that there is a reasonable prospect of sustaining growth in economic activity, which would support a further gradual decline in the unemployment rate. There is also a good prospect that the growth in wages and the rate of inflation will gradually lift over the period ahead. That’s what’s implied by our central forecasts,” Dr Kent ended his speech to a Bloomberg conference.
"Monetary policy has also responded, with interest rates reduced to low levels. So while mining investment and nominal GDP growth have both been weaker than the forecasts of a few years ago and, more recently, inflation has been a bit weaker than expected, growth in the non-mining economy has picked up and been a bit better than earlier anticipated. Indeed, of late, real GDP growth has been a bit stronger and the unemployment rate a little lower than earlier forecast.
"In many respects, the adjustment to the decline in mining investment and the terms of trade has proceeded relatively smoothly. The Australian economy has performed well compared to other advanced economies. Moreover, the drag on growth from declining mining investment is now waning and the terms of trade are forecast to remain around their current levels.
"Of course our forecasts are subject to the usual range of uncertainty. But, given that commodity prices have increased substantially over the course of this year, some stability in the terms of trade from here on seems more plausible than it has for some time. Developments in China are likely to continue to have an important influence on commodity prices, given China’s role as both a major producer and consumer of many commodities. For this reason the outlook for the Chinese economy is a key source of uncertainty for the Australian economy,” he said.
