The Australian economy may not be experiencing the kind of growth rates it saw before the GFC, but it is still doing well and “successfully rebalancing following the mining investment boom” RBA deputy governor Philip Lowe said in a speech at the UDIA national congress today.
Lowe highlighted that even though the prices of commodity exports had collapsed 40% with mining investment down by the same amount, “our economy has continued to expand at a reasonable pace, with growth over 2015 having been a bit stronger than was earlier expected and not too different from the long-term average.”
That growth is important, Lowe said, because it meant that aggregate demand was strong enough to keep the unemployment rate “broadly steady” while at the same time accommodating the rise in the participation rate (which would have caused unemployment to rise if aggregate demand had been weaker).
Lowe highlighted the now well-known fact that the service sector produced the lion’s share of those jobs and said that overall he sees a “picture of our economy adjusting reasonably well to the changed circumstances”. Other indicators such as business surveys, business credit growth, and the national accounts support this view.
The economy is not about to lift off, but it all points to the rebalancing necessary.
And it reveals a previously unheralded resilience which reflects “in part, the flexibility of three key prices: the exchange rate, the price of money (or interest rates), and the price of labour.”
Lowe highlighted that the impact of the drop in value of the Australian dollar is “evident in the improved conditions and prospects for a number of industries, including tourism, education, agriculture and parts of manufacturing”.
He highlighted that just like the appreciation which took the Aussie to 1.1080 during the mining boom, and acted as a brake on growth, the fall in the Aussie is acting as the natural shock absorber it has become since the float in 1983, and provided a boost to growth.
That could be a signal – ever so slight – that with the Aussie up near 75 cents, should it appreciate too far, Lowe and his colleagues at the RBA may need to downgrade the economies growth prospects. That’s one reason both Paul Bloxham from HSBC and Tim Toohey of Goldman Sachs believe the RBA will be easing in the second quarter of 2016.
On low interest rates, Lowe said the transmission mechanism was “most clearly evident in residential construction activity, which increased by 10 per cent over 2015”.
That then spills over into other areas of the economy he said, adding that residential construction is likely to continue to grow in the quarters ahead.
Looking at the vexed question of wages, and the trade-off between more people working but the slowest rate of wages growth in a generation, Lowe highlighted that low rate is helping to drive the increased number of jobs.
Lowe highlighted that average hourly earnings have shown no growth in the past 12 months, while the ABS wage price index had fallen to its lowest level in the 17 year history of the series. That’s not entirely bad news, though Lowe said (our emphasis):
These types of wage outcomes are much lower than what most people had become used to and lower than suggested by the historical relationship between wages growth and unemployment. While this low wage growth is one factor constraining consumption growth for many individual households, importantly, it means that more people have jobs and this is clearly a positive for both aggregate household spending and the broader society.
Flexibility is key, he said, and it ties back to what appears to be a fairly sanguine outlook from the RBA for Australian growth.
Lowe said the RBA’s “central scenario remains for growth in output to be a bit below trend over 2016, but then gradually to strengthen as the drag from lower commodity prices and mining investment wanes, and more of the increased capacity in the LNG sector comes on line”.
That’s good news.
But in highlighting why Australia has been resilient Lowe also points to the key areas the RBA will be watching closely in the months ahead. That implies any rally in the Aussie dollar, slowdown in construction, or given back of 2015’s strong employment growth could see a policy adjustment – a rate cut.
Likewise for all his positivity around the economy Lowe is not saying the outlook is without risk.
It’s just the risks appear to be from offshore and “seem to lie in the international sphere,” Lowe said.