RBA bigwig reveals how economy can escape slow lane
Whether Australia chooses the path to prosperity or remains in the slow lane depends largely on productivity stabilizing, according to a senior Reserve Bank official.
Australia’s economy faces three possible paths forward, RBA deputy governor Andrew Hauser told a group of investors on Monday.
And which route is taken will determine how much more interest rate relief mortgage holders can expect.
Australia is going through an unusual recovery as the economy looks warmer and unemployment remains lower than historical trends suggest it will occur after a period of high interest rates, the central banker’s second deputy said.
The economy was already growing as fast as possible without increasing inflation, due to the rapid growth in demand following the COVID-19 pandemic, the Central Bank’s deliberate keeping of interest rates low to preserve employment, and the weak growth in supply.
Addressing the UBS Australasia Conference, Mr Hauser said Australia was experiencing the “narrowest economic backdrop” for recovery since at least the early 1980s.
As a result, he said, achieving the RBA’s aim of bringing inflation back to target over the medium term would require interest rates to remain relatively restrictive.
But exactly how this will play out remains unclear, Mr. Hauser said.
One possibility is that inflationary pressures have been exaggerated. Perhaps the rise in inflation in the September quarter was purely temporary, the labor market may not be as tight as feared, or the global economy may deteriorate and activity may slow.
This will give the central bank slightly more room than thought to cut rates further.
The second possibility is that the economy is “limited” due to capacity constraints and has little opportunity to grow without inflation remaining above the target.
There is some evidence to suggest that the rebound in inflation is more durable; Increases in construction costs and market service prices can be sticky, and financial conditions no longer constrain activity.
Household spending may rise and global financial conditions fueled by the AI boom may prove resilient as strong iron ore prices continue to support the Australian economy.
“From this perspective, there may be little room for further demand growth without increasing inflationary pressures, and therefore little room for further policy easing,” Mr. Hauser warned.
But if this view turned out to be correct, there was a third path Australia could choose; an “escape route”.
To escape the inflationary impasse, Australia needs to find a way to expand the country’s economic pie by increasing productivity.
Productivity growth is already expected to rebound modestly from current low levels, but the RBA forecasts it will recover to just 0.7 per cent, which is below the historical average.
Mr Hauser said Australia needed to revive business investment, which has been flat over the past 18 months, to further boost the economy’s productive capacity.
“If we go back to the growth rates we are used to, the big picture challenge for the economy in the medium term is how to create more supply capacity,” he said.
“If we don’t do this we may find ourselves stuck between the rails. If we are successful we can be off to the races.”
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