Speech Summary Resilience and Ongoing Challenges

This speech revisits the broad themes which were examined in the Deputy Governor's previous speech to the UDIA National Congress in 2010. These themes were the resilience of the Australian economy and the challenges of boosting productivity, ensuring a balanced supply and demand in the housing market and keeping inflation low and stable.

Starting with discussion of the economy's ongoing resistance, the speech underlines that, despite a significant decline in mining investment, economic growth in 2015 was close to its long-term average. It contends that this, in part, reflects the flexibility of three key prices in the economy: the exchange rate, the price of money (or interest rates), and the price of labour. The exchange rate is said to have played a role in ‘buffering’ the economy, preventing overheating during the boom and, more recently, supporting conditions in non-mining industries, including tourism. Low lending rates have also supported growth in residential construction activity which has had spillover effects to other parts of the economy. Lastly, the overall effect of low wage growth is said to be that more people have jobs. This, in turn, is said to be a positive for both aggregate household spending and society more broadly.

Moving to the productivity challenge, the speech notes that real income per capita in Australia has stalled over recent years. It proceeds to the conclusion that our future income growth will rely largely on the workforce's ability to lift productivity.

On issues in the housing market, the speech notes that growth in the number of dwellings has increased so that it now exceeds population growth. This, in turn, is given to have had a moderating effect on the rate of house price growth in Sydney and Melbourne. The challenge of ensuring housing affordability in future is discussed, and in particular the need to ensure an adequate supply of well-located land, given that high housing prices largely reflect high land prices.

On inflation, the speech notes that inflation in Australia remains consistent with the medium-term target, although it is below the midpoint of the target range. It also notes that inflation outcomes globally have been very low and suggests that this is partly because of low wages growth in most advanced economies. In exploring the possible cause of the ‘commonality’ of low wage outcomes and fairly strong employment gains in a number of large advanced economies, it is ventured that a global influence may be at work. One possible influence presented is that workers in these economies perceive themselves to have less bargaining power as an after-effect of the financial crisis and the globalisation of many service industries. The dynamics of labour markets are presented as being critical to the future path of inflation and it is suggested that, should wage outcomes remain subdued among advanced economies, it is likely that monetary policy will also remain very accommodative.

The speech finishes by turning back to the economic outlook in Australia. Continuing low wages growth is given to mean that CPI inflation is also likely to remain relatively low. In turn, the low inflation outlook is said to provide scope for easier monetary policy, should that be appropriate in supporting demand growth in the economy.

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