The Reserve Bank Governor delivered a speech in Hong Kong titled “Economic Conditions and Prospects”. The speech was largely a sell of the Australian economy whilst highlighting the challenges that are likely to be faced over the medium term.
Interestingly the Governor highlighted the difference in opinion of foreigners versus locals on the Australian economy. Foreigners seemed to have a more upbeat view whilst “some parts of the Australian community and the tendency to focus on the difficulties, rather than the opportunities, which come with our situation”.
The Governor focused on the structural shift taking place in Australia but also highlighted that the Asia region had its own array of challenges, “So for all of us, the challenges are those of adaptation to changing circumstances and new opportunities. A fascinating journey lies ahead. We in Australia will be facing our own adjustment imperative. We will also be taking more than a casual interest in developments in the region in this ‘Asian century’”.
The Governor gave his endorsement of the longer-term Chinese growth story. “China will have cycles like other economies, but it seems likely that the Chinese economy will grow pretty strongly on average for a while yet. It will be a very large economy. Even at the new growth target of 7½ per cent, a lower target than in the past five years (all of which were, of course, exceeded), Chinese GDP will equal that of the United States, in Purchasing Power Parity terms, in about a decade. It will exceed that of the euro area within the next few years”.
What does it all mean?
- The Reserve Bank Governor delivered a speech today titled “Economic Conditions and Prospects”, and that is exactly what it was. The Governor did not provide any subtle hints on any further rate cuts but focused on the more thematic big picture view of the economy, highlighting the strengths of the Australian economy and the likely challenges that will need to be met to ensure future growth.
- It was clear that the speech was a positive sell to Asian investors on the virtues of the Australian economy, although the Governor did concede that foreign investors seem to be more upbeat on the Australian economy than local Aussies. It was clear that the Governor thought it was a little bit strange that foreigners were more positive on the Australian economy than we are domestically. In fact the Governor did go one step further highlighting the structural changes that are taking place in the domestic economy and the need for Australians to adjust with the shifting economic landscape.
- When it comes to rates the Reserve Bank is in “wait and see mode”, with the next lot of inflation data (in late April) likely to give central bank authorities a better picture of the inflation landscape. If the Governor wanted to signal a near-term move in rates he would have used this opportunity to do so, especially because he was given a blank canvas for today’s speech. In fact there was nothing in the speech to suggest the Governor was overly concerned with the current position of the global economy.
- The Governor made it very clear that despite the recent slowdown in Chinese growth activity in the region remains relatively healthy. In fact the Governor highlighted the sheer scale of the Chinese growth story – “Chinese GDP will equal that of the United States, in Purchasing Power Parity terms, in about a decade. It will exceed that of the euro area within the next few years”. In addition Chinese authorities having a degree of latitude to stimulate their economy if deemed necessary over the medium-term.
- Overall CommSec still expects the Reserve Bank to cut interest rates once more in May in an effort to support business and consumer confidence while providing much needed stimulus to the anaemic residential construction sector.