RBA assistant governor Christopher Kent was pretty positive on his outlook for the Australian economy addressing a major economic dinner overnight.
He told the Australian Business Economist dinner that “low interest rates and the depreciation of the exchange rate since 2013” meant “growth of non-mining economic activity is expected to be around average over the next two years”.
But there is also a chance that that outlook gets a considerable kicker from improving economies in the mining states.
Kent flagged the “improved outlook for commodity prices is not likely to lead to a noticeable pick-up in mining investment” in the near term, but he does believe the forces restraining the mining states are also “waning” and the lift in the terms of trade means “there are reasonable prospects for stronger growth of nominal demand in the mining states and, by extension, for the economy overall”.
That’s good news and helps add colour to comments in the RBA board’s November minutes, which concluded that the Australian economy is expected to grow close to potential in the coming quarters before accelerating above potential later in the forecast period.
But because of the mining industry’s shift from the build to production phase, mining states have suffered, Kent said.
Employment in Western Australia, which peaked at 1.373 million (I’m using unadjusted numbers to show the actual estimate of jobs lost), fell to a low of 1.323 million in September this year before the ABS estimated 10,000 jobs were created in October.
Month-to-month variations in seasonally-adjusted ABS jobs data are widely regarded as rubbery, but the improvement picks up on the RBA and Kent’s confidence in the game-changing nature of the persistence of the rally across commodity markets from this years lows as a game changer for state and national income and as a result economic growth.
Kent said (emphasis added):
Our forecasts are for the terms of trade to remain above the low point reached earlier this year (and about 25 per cent above the average of the early 2000s before the boom). While our forecasts are uncertain and subject to various risks, the upward revision represents a marked change from the pattern of the past five years.…if our forecasts are right, the terms of trade will shift from the substantial headwind of recent years to a slight tail breeze providing some support to the growth of nominal demand.
That should show up in employment as the ABS data suggests.
Turning from the West to Queensland, Kent said its better performance is because of economic diversification and the faster pace of the mining adjustment.
“The Queensland economy has fared better than that of Western Australia, in part because the fall in mining investment has been more advanced in Queensland. In addition, Queensland has had the advantage of its sizeable exposure to the education and tourism industries” he said.
As the negative forces on mining states wane, the overall outlook for the economy is brightening and wages may actually start to lift across the nation.
In many respects wages are low here in Australia because national income has been low. But a pickup in terms of trade should provide a tailwind for higher wage outcomes.
That, in turn, should give more confidence to consumers to spend and help keep the domestic economy on track for the RBA’s expectations of growth.
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