The RBA thinks Australia's economy is heading in the right direction, but it comes with several caveats

Photo by Don Arnold/Getty Images

While it comes with a lot of caveats — none more so than what will happen in China — the Reserve Bank of Australia (RBA) is clearly optimistic on the outlook for the Australian economy.

In a speech delivered in Sydney earlier today, RBA assistant governor, Christopher Kent, provided a cautiously optimistic assessment on where the economy is heading, suggesting that “there is a reasonable prospect of sustaining growth in economic activity, which would support a further gradual decline in the unemployment rate”.

Here’s a snippet from the speech delivered this morning:

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.

There’s obviously more than a few caveats to that view coming to fruition with Kent acknowledging “that’s what’s implied by our central forecasts”.

Kent suggested that the drag on real GDP from falling mining investment was now likely to wane — fitting with the capital expenditure report released two weeks ago — noting that “three-quarters of the anticipated decline in mining investment is now behind us”.

“Since 2012, growth in real non-mining activity has picked up gradually and has generally been a little stronger than was expected, supported by lower interest rates and the depreciation of the exchange rate,” he added.

This chart below shows the evolution in the RBA’s forecasts for Australian mining and non-mining activity going back to 2012.

After helping Australia’s economy transition away from the mining infrastructure boom, Kent also stated that there were promising signs for wage growth, a key component in helping to boost household consumption, the largest component within the Australian economy.

“More recently, wage growth has shown signs of stabilisation, with growth in the private sector wage price index unchanged for the past six quarters, while a broader measure of wage pressures, the growth in average earnings per hour, has picked up of late,” he said.

Noticeably, despite signs of stabilisation in wages growth, Kent made no specific remarks on the outlook for inflation, simply acknowledging that it had been “lower than expected more recently” with it seen “rising to be consistent with the medium-term target”.

There was also no commentary on the outlook for interest rates with Kent simply noting that the bank had “reduced the cash rate to low levels to improve the prospects for sustainable growth in the economy”.

While Kent is clearly optimistic towards the outlook for the Australian economy, that view is based on current forecasts, something that have not always come to fruition in the past.

Front-and-centre of that uncertainty is the outlook for the Chinese economy, says Kent, noting that it will “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.

Markets will receive a little more on that front later today when Chinese industrial output, retail sales and fixed asset investment figures for August are released.

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