Speech Summary International and Domestic Adjustment

The speech starts by setting out three key themes of the Bank's recent communication about Australia's transition from the resources sector boom to more normal economic conditions: that the sheer scale of the boom means that this transition is challenging, and that the broader global environment compounds the challenge; that a reasonably successful transition is possible given our economy's positive fundamentals and flexibility; and that monetary policy is doing what it can to help the transition, but that the chances of success would be boosted by a lift in productivity growth and an increase in the expected risk-adjusted rate of return on investment.

The speech also discusses the global backdrop to the transition in the Australian economy, particularly in the context of developments in China. It briefly goes through recent events and what they might mean for the Chinese economy and its longer-term transition to a more market-based economy. It notes that the end of the extraordinary period of sustained growth in China was inevitable and expected. But it suggests that events over the past few months have brought into sharper focus the structural challenges in that economy including: shifting from investment to consumption-led growth; liberalising markets; the evolving demographics; and managing strains and distortions in the financial system and property market.

Returning to discussion of the domestic transition, the speech notes that the Australian economy is now it the third phase of the resources boom – the production and export phase. It identifies that an aspect of this phase is the reallocation of labour and capital that had moved into the sector during the boom, back into other areas of activity in the economy. It estimates that Australia is potentially halfway through the decline in mining investment. It also notes that the prices of our exports are now lower because of the increase in supply of commodities globally, but that the terms of trade are still relatively high in an historical context.

The speech draws to a close by noting the elements that have given the Australian economy the flexibility to adjust to the various phases of resources boom without overheating in the upswing and with continued moderate growth in the downswing. The floating exchange rate, flexible labour market and responsive monetary policy are highlighted as having been key factors in helping with this adjustment. But the speech ends by suggesting there is still a missing ingredient – increased business investment – that would further support the adjustment and ongoing economic growth.

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