RBA Warns Against Economic Pessimism 1

Wednesday, October 14th, 2015
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reserve bank of Australia
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The Reserve Bank’s deputy boss has downplayed the risk of an Australian recession anytime soon, but wants more help to drive economic growth.

RBA deputy governor Philip Lowe said after a remarkable 25 years of economic growth, there would eventually be a period of contraction, and while he refused to rule out the possibility of a downturn he said the probability in the near term is low.

“It’s not our central case, we think the economy is on a gradually improving track,” he told a business conference.

The IMF last week cut its 2015 growth forecast for the world economy to 3.1 per cent, predicting the worst year since the global recession of 2009.

The bank said the weak commodity price outlook could subtract one percentage point annually from economic growth from resource-exporting countries like Australia over the next two years.

But Dr Lowe warned against unwarranted pessimism, stating business conditions were above average overall.

Surveys released by National Australia Bank and ANZ showed a pickup in confidence levels among businesses and consumers.

“Businesses are happy to hire workers, the cost of debt is low, consumers are spending at a reasonable rate,” Dr Lowe said.

“At some point those factors will trip over to increase spending by business on capital … we’re still waiting for it.”

The central bank’s second in charge said monetary policy is not as effective as it used to be in giving the economy a kick along and lift living standards for Australians.

Historically low interest rates were helping boost housing construction and weaken the Australian dollar, which in turn had helped strengthen local tourism along with the retail and manufacturing sectors.

“But, ultimately, the rate of which our living standards improve is unlikely to be driven by the actions of the central bank,” Dr Lowe said.

“(It) rests on our ability to improve our fundamentals and to enhance the flexibility of our economy.”

In order to adapt to the ever-changing business world, Australia must capitalise on four areas outside the RBA’s control, Dr Lowe said.

These include maintaining a competitive environment, rewarding innovation through tax and regulation and reforming the education and industrial relations systems.

The glacial pace of wage growth in recent times has allowed employment to grow reasonably strongly despite below-average growth in the overall economy, he said.

But Dr Lowe questioned whether the country’s industrial relations system was flexible enough to deal with structural change.

“It should be possible to simplify and improve the responsiveness of our current system while, at the same time, addressing the sometimes unequal bargaining positions in the labour market,” he said.

By Lucy Hughes Jones
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  1. Slater

    These people say anything and they keep opening their mouth right up to the next crisis, which they never saw coming!