Sat, Feb 06, 2016 - Page 15 News List

RBA sees faster growth despite risks from China

A HELPING HAND:The relatively strong growth of labor-intensive sectors, such as household services, has reflected on employment growth, the bank said

Bloomberg

Australia’s central bank maintained its forecast of accelerating growth in response to easy policy, even as risks around key trading partner China cast a shadow over the regional economic outlook.

The Reserve Bank of Australia (RBA) trimmed its inflation forecast for the year through June and its growth projections for next year in a quarterly monetary policy statement yesterday, but it kept most of its estimates unchanged.

“A further increase in growth in household incomes and demand is anticipated, supported by rising employment, low interest rates and lower” gasoline prices, it said.

“The outlook for China’s growth is a significant uncertainty for the outlook for the Australian economy,” the bank said.

Policy makers kept rates unchanged at a record-low 2 percent on Tuesday for a ninth month as they gauge the impact of recent financial market turbulence on global and domestic growth. However, traders are pricing in a better-than-80 percent chance the RBA will cut rates in the next six months.

Australia recorded its biggest quarter of employment growth on record at the end of last year and unemployment fell to 5.8 percent, even as the economy was on course to expand at a below-trend pace.

“It is possible that the strength in the labor market data contains information about the economy not apparent in the national accounts data,” the RBA said. “In part, employment growth appears to have reflected the relatively strong growth of output in the more labor-intensive sectors of the economy, such as household services.”

Reflecting lower global commodity prices, the central bank lowered its forecast for the terms of trade, or the ratio of export prices to import prices, by about 4 percent compared with its estimate in November last year.

Given inflation is low and the central bank expects little upturn, it reiterated that there might be “scope for easier policy, should that be appropriate to lend support to demand.”

While global central banks are struggling with disinflation or outright deflation that an open economy like Australia’s would be exposed to, one of the curiosities to date is the lack of pass through of higher import prices from a falling currency.

“Heightened competitive pressures, including from new entrants into the Australian retail market, and greater efforts by retailers to reduce their costs and improve efficiency, are continued to limit the extent to which higher import prices are evident in final retail prices for some time,” the RBA said.

That is a boon for consumers.

The central bank also said its forecast for better household consumption and income growth — reflecting higher employment and the plunge in gasoline prices — indicate the nation’s savings ratio is likely to decline less than previously expected.

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