Australian economy undergoing major adjustment

On Friday 18th September Reserve Bank of Australia Governor, Glenn Stevens, addressed the House of Representatives Standing Committee on Economics, describing the Australian economy as navigating major adjustments in the midst of testing international circumstances.

Despite falling terms of trade and a lag in capital spending in the resources sector, Mr Stevens described the non-resource parts of the Australian economy as experiencing gradual improvement – albeit not as fast as would be liked.

“Survey-based measures of business conditions have been a bit above their longer-run average levels for some time now, and the most recent readings are about where they were in 2010. A few of the non-mining sectors have shown quite marked improvements over the past twelve months,” said Mr Stevens.

Mr Stevens noted that the improvement is not uniform, with NSW and Victoria seeking the most marked improvement.

“It’s also worth noting that performance in the Unites States continues to improve. Everyone knows that, eventually, this will have to be reflected in less accommodative US monetary policy. Some fretting about the first increase in US interest rates for nine years is to be expected, no matter how well telegraphed it has been. The more important factor, though, will be the pace of subsequent increases. The Federal Reserve has indicated this is expected to be very gradual, but of course that will depend on what happens with the US economy. There is a degree of irreducible uncertainty here and hence the possibility of further financial market volatility at some point. Overall though, it seems very likely that global interest rates will still be quite low for quite some time yet.”

In September, and against the anticipation of many economists, the Federal Reserve kept the US cash rate steady at 0.25%.

Citing support for continued progress toward maximum employment and price stability, the Federal Open Market Committee noted that domestic economic activity is expanding but that there was a risk of global factors weighing the economy down.

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