RBA governor Philip Lowe says there are 3 key issues facing the Australian economy

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Australia needs to embrace technology, develop its relationships with the major Asian economies, and carefully manage household debt as global monetary policy begins to tighten, Governor Philip Lowe said today in a speech called “The Next Chapter”.

In looking back at the last 10 years, Lowe said that the most recent chapter had been a successful one as Australia maintained its run of economic growth while transitioning away from the mining boom.

“At the same time, though, as the chapter draws to a close, we do face some issues,” Lowe said.

He highlighted three key challenges that the country needs to address to effectively manage the transition to the next stage of growth.

1. The slowdown in disposable income per capita

Lowe noted that over the last 20 years, Australia had benefited from strong productivity and high commodity prices. The chart below shows how that translated into higher real income growth per person, until a dip during the global financial crisis.

It’s since struggled to gain traction since the end of the mining boom in 2011:

2. Slow wages growth

This has been a major theme across developed markets, and appears to be one of the main reasons why highly accommodative monetary policy has failed to translate into a rise inflation.

“Over the past four years, the increase in average hourly earnings has been the slowest since at least the mid 1960s,” Lowe said.

He said the end of the mining boom was one reason for that but there were structural factors as well, which include the rising number of part-time workers in Australia.

3. Household debt

Australia’s high levels of household debt will be a familiar theme to anyone who takes a passing interest in the domestic economy.

Lowe said that for now, Australians are “coping well” with higher levels of debt. For now, only a small number of borrowers are falling into arrears on their home loan payments.

However, “as debt levels have increased relative to our incomes so too have the medium-term risks”.

“Higher levels of debt also mean that household spending could be quite sensitive to increases in interest rates, something the Reserve Bank will be paying close attention to,” Lowe said.

It means Australia will have to carefully manage its exposure to household debt, particularly if the relatively positive economic backdrop gives rise to an increase in interest rates as global central banks begin to reduce liquidity.

Looking ahead, Lowe remains optimistic about the future prospects of the Australian economy.

“We have a strong institutional and policy framework, a skilled, growing and diverse population and a wealth of mineral and agricultural resources.”

“We have strong links to Asia, the fastest growing part of the global economy. We also have a flexible economy with a demonstrated capacity to adjust to a changing world.”

In order to make the most of those advantages, Lowe said that Australia needs to invest in human and physical capital, and continue with effective policy reform.

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