Transcript of Question & Answer Session Defining Full Employment and its Intertwined Relationship with Inflation

Thank you, Sarah. And I’m going to ask her a few questions, but then I’ll move on to questions from the audience, so please get your questions ready to go. So you did touch on this new speech, but I just wanted to delve into it in a bit more detail. Often economists and commentators talk about the trade-off between inflation and unemployment as if it’s one way or the other. You’ve got a dual mandate at the RBA and you’re going to achieve that full employment as well as that lower the steady inflation within the range. How do you view that in terms of trade-offs, particularly around timing and how does that affect the decision making of the Bank?

Yeah, it’s a really good question. So I think framing this or answering this in the current context, really what the Board are trying to do with policy, because it really comes back to the policy decision that gets made ultimately. I think that the Board have been pretty clear, I hope on their strategy for some time. And it’s really a strategy that’s based on how quickly does the economy return to low and stable inflation and return to full employment. So throughout the tightening cycle, post Covid and in the months, years since then, the Board have been clear that they want to return inflation to target. They’re absolutely committed to doing that. That is important. Low and stable inflation is the best setting we can have in the economy in terms of inflation. But they wanted to do that in a way that protects the gains in the labour market is typically how it’s been described. And what that means is they want to do it in a way that perhaps it takes a little bit longer for inflation to come back to target. But you get the softening of the labour market is more gradual. The comparison point for this, you can look at other central banks that have returned inflation to target a bit quicker than that. They typically they have to go higher with their interest rates than we have. New Zealand is a good example. They went higher with their interest rates. Inflation has come back down more quickly there. But their labour market has softened much more than ours. So they currently have a much higher unemployment rate and it lifted a lot more than we did. And so that’s really the trade-off. It’s more of a temporal trade-off. There isn’t actually a trade-off between in the long run having a different inflation rate and a different unemployment rate or a different labour market conditions. In the long run, that trade off doesn’t exist. It’s really the time that you take to return to target. And the Board have been clear that they were comfortable with taking perhaps a little bit more time because they did want to have the softening in the labour market happen more slowly. And that is still the strategy they’re still pretty clear on that, I think. And the Governor often comments that in public.

Fantastic. I’m sure we’ve got some questions from the audience. Just a reminder, if you could state your name and what organisation you’re from. We do have a couple of roving mics.

Thank you very much. Sarah, I have a friend who shares your name. It’s nice to hear you speak. Thank you very much. You mentioned a phrase which we’ve heard from the Governor of the RBA, capacity pressure, a couple of times and obviously there’s always talk about the link to productivity as a way to unlock some of that pressure. When you look across the economy, what gives you concern in terms of its ability to be more productive and what gives you hope? Where do you see good progress?

Great, thanks for the question. So, yeah, so I mean productivity. Maybe I’ll just talk briefly to the history and what we’ve seen, since it’s what’s in the data. It is definitely the case that productivity growth in the economy has slowed down and that’s a long-term prospect. That’s over the last sort of 10 years and certainly the last few years there’s been some particular challenges. I mean, some of it’s probably temporary, but some of it probably is structural, looking over that long horizon. I think we have a technical assumption that we make that sort of covers our forecast horizon, which is just two years. That’s not very long in productivity terms. And the reason it matters for us is that if we’re thinking about, really when we talk about the balance of demand and supply, we really actually focus on the speed of growth of demand versus the speed of growth of supply. So we have a growing population, for example, more people means there’s more food that needs to be grown and consumed, more houses are needed, more electricity consumed and so on and so on.

So we’re talking growth really. And what we’re concerned then is how quickly is demand growing relative to the, the sort of growth rate of supply? And slower productivity growth means a slower growth rate for supply. So we can see that productivity growth has slowed down. In terms of solutions to this, there are many and they are varied. We’re definitely not the experts. The Governor will often talk about the Productivity Commission and the work that they do. And I know it’s also a focus for federal and state governments as well have been very vocal about this. I suppose a couple of comments. One, we’re a small economy. That means that we’re unlikely to be productivity leaders in every single sector. There’s just not that many of us compared to the US and other big countries. So it is going to be quite important for us to be able to bring in new technologies that are developed elsewhere. And AI is perhaps a good example of that. So making sure that we can do that and being ready to do that I think is important. And I think also just looking at things like dynamism through the economy and many authors have worked on this topic, how those new technologies diffuse and flow through and how easy it is for new firms with new ideas to start up and things like that can also be quite important. But generally speaking, I would point people to the experts on this and those guys at the Productivity Commission and others in federal and state governments have got lots of good ideas. And yeah, productivity matters, matters for us, but it’s also fundamentally how we lift living standards. So it does matter for the country overall.

Bits of the economy that worry you though, you didn’t talk about …

So I mean it’s tricky to talk about parts of the economy that might be concerning because there’s very good reasons for us to have the industrial and the structure that we do. So I tend to think about it much more in a sort of more aggregate sense. And I also tend to think about it in the context of, well, where does productivity growth come from and what do we need to float through the economy? So I think a lot of what I just said probably applies to pretty much every sector and all sectors sort of have to at least try and lift to get that aggregate to come up.

Thanks. Matt McKenzie from The West Australian. Trading shortage, does that reflect excess demand or some other factor? And secondly, historically inflation seems to bounce back very quickly. You know, looking at history from the seventies and the eighties and so on. So was it perhaps over enthusiastic to cut rates three times last year?

So on your first question. Certainly we can see very clearly that there is a very strong demand from, if we’re talking tradies, I tend to think of construction, people working the construction sector. Very strong demand in all aspects of the construction sector right now. Residential, non-residential buildings. So data centres form a big part of that at the moment because they’re building a lot of those, and then infrastructure. And I’m sure many people here will be very familiar with the infrastructure projects happening on the ground in WA. Yeah, so there’s just, there’s strong demand and there’s not the supply of the skilled workforce that can meet that demand. And we hear that very, very regularly through our liaison program. It’s also reported in the business surveys. Many people in the room, I’m sure, have got an anecdote or two about it being tough to find someone to come and do some work. On your second question, it’s really that forecasting is a really difficult business and our forecasts are often wrong. In fact, in the SMP we publish the average size of our historical errors is our fan chart. So if you look at our forecast charts in the SMP, they’re not just straight lines on a chart, there’s actually a fan around them and the fan captures the errors. So things change, events happen that we don’t predict and foresee. In terms of what we thought was happening in the economy last year and what’s changed from then to now, I think there’s a few factors I’d highlight. First, global conditions really did change quite rapidly and the global economy turned out to be a lot more resilient than we were anticipating. So tariffs and other US policy settings, clearly still a lot of flux and uncertainty around that, but the global trading system adjusted much more quickly and proved to be much more resilient than many people were expecting.

Also, the AI boom globally, the investment boom globally has been very, very strong, much stronger than was anticipated. And I think importantly for Australia, that’s shown up in two ways. One, in actual investment in data centres and on the ground here in Australia that we weren’t anticipating perhaps at the start of last year, but also too in terms of global activity. So it’s been, obviously we’ve got a lot of activity happening in the US, but that spilled back through into the Asian supply chains. So Taiwan, Korea, Singapore, these sort of high-tech, high value-add manufacturing countries are growing very, very strongly and they are a key export market for us certainly when you put them together. So there’s been some strength there. We’ve also seen perhaps with financial conditions that they haven’t been as restrictive as we thought they would be. So we’ve seen a number of aspects of that. Risk premiums are very low at the moment. Equity markets, wiggles day-to-day aside, are at pretty high levels. Credit growth has been pretty strong. So that’s all flowing into the economy. And we’ve had domestic demand, private demand has recovered more quickly than we are anticipating. We did expect there to be a recovery in the private sector through the back half of last year. It’s just been a bit stronger than we were anticipating. That’s both household spending and investment. I mentioned business investment also on the dwelling investment side too. So a whole lot of things have come through more positively than we were expecting. Obviously inflation has come through more strongly than we were anticipating and to our advice to the Board has taken that in and has, you know, and the Board have decided now was the right time they needed to raise rates and that’s obviously it’s what it is. So a lot of things have shifted and moved and that’s really what’s changed the assessment of the economy. And then the board responded with their decision for the cash rate.

Everyone gets forecasting wrong so it’s a really challenging kind of way to do it. And so with decision making and information changing all the time, change a lot of the inputs, see how that goes. More questions?

Thanks very much. I’m just really interested in your charts had there Sarah were the one that had the output prices and that shot up around about 4 per cent and it made me wonder, do you have specific rules of thumb for each of the transmission mechanisms, the way it goes in? So I imagine if there’s an exchange rate shock probably happens pretty fast speaking to CPI, whereas otherwise wages might be a bit slower. I’d be interested to know what sort of time frames you think about while you’re modelling that.

Yeah, it’s a good question. So normally we think about sort of lags and how things flow through the economy from a sort of monetary policy perspective. So, you know, the cash rate changes for instance. How long does that take to show up in the economy? What we find in our models is there are a number of different transmission channels for monetary policy and they work at different time horizons. So one of the quickest ones is one that you mentioned actually, the exchange rate. And in fact the exchange rate, the Aussie dollar has strengthened a bit recently against the US dollar but actually against a broad basket of goods and some of the mining sector in the room probably very aware of that given your revenue tends to be earned in foreign currency. And so that one can happen very, very quickly. In fact, we think that some of the lift in the exchange rate just recently reflects the fact that markets are have changed their expectations for the cash rate and so that will start coming into the economy straight away. It does take time for it to pass through fully into consumer prices. It also takes a bit of time for it to pass through fully into actual activity. So for example, one of the channels, if the exchange rate stays stronger now than it was over the past year, I’d expect to see through this year that we might get a pickup in the number of people choosing to take their holiday overseas rather than staying at home because it’s a bit cheaper now to go overseas than it otherwise it would have been a year ago. And at the margin, some people might decide Bali is the place for a holiday this year as opposed to the Gold Coast. But we’ll wait and see. It’s got to, you know, you have to see that exchange rate move sustained for those kind of decisions to be made. But I use it as an example of transmission, it taking a bit of time. Other channels that are quite quick, everyone I’m sure will know this one, the cash flow channel, which is what we call the mortgage interest rate channel. Most people with a mortgage, vast majority have a variable rate mortgage. That will happen very quickly and you’ll start seeing that on your repayments pretty soon.

That channel though is actually it’s relatively small in an aggregate sense. I want to stress that if you have a mortgage, if you have a very large mortgage, it’s clearly very important to you individually. That’s absolutely true, but only around third, actually a touch less of people have a mortgage in the home that they own. Everyone else either owns their own home outright or they’re renters, in which case they’re not impacted by this cash flow channel. So that’s why it’s small in an aggregate sense. But it can be very large for an individual. That’s quite a quick one. But others, finally, that take a little bit longer are decisions that households and businesses might make over whether or not to save a bit more money today versus spending it today. So as a household, if you get a higher rate of interest, you’ve got some money deposited at the bank. Maybe you choose to save a bit more because you’re earning a bit more interest. As a business, you might be looking at a slightly higher cost of borrowing because the cash rate’s gone up. And that might make you put a project on ice if it was a bit marginal. But that project may not have been kicking off for 6 12, 18 months. You make the decision today not to do it, so there’s a long lag there. And same thing for building your own home, dwelling construction activities. Again, if you’re borrowing to fund that and just at the margin the project doesn’t quite work and you decide not to do it, then that activity won’t happen. But it would have happened not today necessarily, but in the future. So yeah, there’s a lot of lags and pass through from those sort of cost side into final inflation. From policy all the way through into inflation can take quite some time. So we typically think that when we aggregate it up, peak impact from a policy rate change, change is sort of 9 to 12 months after the change, but it ebbs all the way through to maybe 18 to 24 months. So some impact today, it builds and then it ebbs away.

Just to follow up to that question on the lags in monetary policy and the impact on the labour market. So the economy changes all the time, the lags will change as well. Can you give us a rough estimate, Sarah, of a decision by the board today how long it would take to affect labour market conditions?

It’s about that sort of lag structure I just talked about. Inflation is typically the last sort of thing that it shows up in, the labour market a bit sooner, activity a bit before that. But it’s around that time horizon, which is actually why we have to do forecasting. Forecasting, thank you for saying what you did, forecasting is really tricky. I’ve been doing it a long time. I’ve got a good sort of list of things I’ve gotten wrong and where I’ve always tried to learn to understand what did I miss? But this is why we have to do forecasting, because when the cash rate decision, whatever it is, isn’t really having much of an impact today, it’s having an impact in the future. And that’s why we need to understand what we think the future is going to look like and then you adjust policy accordingly. So it’s a difficult business, but it’s a necessary business precisely because of these lags.

I’ll just do a quick follow up. The other one was around migration actually. And the impact of migration because migration is a big thing for West Australian businesses especially, and the impact on labour market dynamics.

Yeah. So migration, Australia has a long history with migration. Obviously migrants have been moving here for decades and decades and decades and that’s still certainly the case. And that migration, overseas migration is still positive. In terms of how we think about it impacting the economy, we tend to think in the long run on a per capita basis and in terms of inflation, it’s broadly neutral. So people, when people move here, they might be moved, especially if they come here as a skilled worker. They come here and they’ll supply themselves to the labour market. So they’ll be on the supply side of the labour market. But because they live here, they need to eat, they need somewhere to live, they’ll go out and eat in restaurants and need clothes and all those other goods and services. So they contribute to demand as well. And in the long run, the evidence that we have suggests that it’s broadly neutral. So there’s some supply, they come in, they provide some supply, they add to demand and these two sort of cancel each other off. And so you don’t get any impact on inflation in particular. Both supply and demand are bigger, the economy is larger, but inflation is a broadly neutral effect. In the short run, that’s not necessarily true because the supply of some of the goods and services that households need is fixed. That can be particularly true in local housing markets. And we saw that a little bit the impact of that through the COVID migration recovery, where some parts of the rental market, more in Sydney and Melbourne than here, Western Australia had strong population growth because of internal migration as well as overseas migration. But in some parts of Sydney and Melbourne it was pretty clear that rents were rising partly because there was this new demand that had suddenly come back as people could return to the economy. So there can be some short run dynamics as well, and we’ve written about that in the past. But in the long run we tend to think from a monetary policy perspective it’s neutral. But obviously there’s much broader questions with migration which I’d leave to others in other policy arms to tackle.

Thanks. It’s been great to listen to you today. This might be a bit obvious, but I’m really keen to hear directly from you your views on full employment. And it’s often talked about as potentially another target that we try to achieve in the Australian economy. But over time, both the way we measure it and the way we talk about it in economics is changing and I was just really keen to hear from you. How important is it that we move away from that language or should we still embrace it, but measure it and talk about it differently?

Yeah, it’s a great question and you’re right, there is definitely a time dimension to this. I might sort of draw on some of what I said in the speech. So in the short term, so over a sort of one, two-year horizon, which is the horizon monetary policy is really focused on, structural shifts in the labour market, they’re innately quite slow moving. And so they won’t typically have too much of an impact over that sort of short run horizon. That might not be completely true. And actually I just made a reference to the recovery in migration post Covid that was, we’ve not seen anything like that before, but clearly quite exceptional circumstances. Setting those types of periods aside, the labour market structurally doesn’t change that quickly over a one, two-year horizon. So that horizon, from the perspective of us giving monetary policy advice, I think the definition we have works quite well. What is the capacity of the labour market, the capacity of the economy that if the economy is operating at that capacity, then we should have inflation low and stable because it should be lining up with our target 2.5 per cent, low and stable. Over time though clearly that capacity can change and structural shifts happen. I talked very briefly about what economists call the participation rate, which is the proportion of people who are either in work or looking for work of the total population, that has changed dramatically over decades, long horizon.

We have many more women that now participate in the labour force than before, which I think that’s actually fantastic that women are able to do that and society is now facilitating that much more. People might now be working a bit longer, so retiring a little bit later as life expectancies have lifted, more people going off to university and delaying their entry to the workforce. That’s also been playing out as well and many other changes besides. So more people proportionally now are choosing to work part-time than have in the past. And so that has implications for total labour supply as well. Those kind of structural changes playing through, they really, really matter on a longer term basis. And it is for society, I suppose to decide what it thinks is appropriate in terms of policy settings to enable that or otherwise. And looking at it on that time horizon, you really do need to think about how you measure full employment. It has to be more than just what is the unemployment rate. And there’s, you know, how do we even think about holistically what people want to participate in the labour market, to what extent and how do we capture those kind of metrics? We do try with some of our data, but it is a bit incomplete. But I agree actually you need to think about it very holistically. I don’t think over a long time period it makes sense to just narrow down on one or two metrics because I think you are missing a lot of the big picture.

Does it make sense to keep a target, in a sense?

So I think that this is where, in the context of monetary policy, why we don’t put a number on it because it’s very hard to. And I’m not sure we could ever actually measure it because we would really have to understand how every single person wants to interact with the labour market and I’m not sure we’ll ever get to having that type of information. So I think it’s more the dual mandate. I think it’s there as a framing for how the Board makes its decisions. But the reality, if I compare how the Board here makes decisions compared to other central banks that might only have a formal inflation mandate, I’m not sure that the decision making is that different. And I think in whatever the case, the boards in those countries or the equivalent to the boards in those countries are always pretty clear on their strategy and that’s actually what really matters in the context of setting policy.

Thanks for the presentation, Sarah. I just had a question on the RBA. Do you think you’re putting a bit too much weight on the temporary factors driving the recent pickup in inflation? For example, you know, housing inflation is running at 5.5 per cent. Market services is running over 4 per cent as well. They tend to be more persistent and sticky and a lot of supply constraints in these areas will likely take a while to abate.

Yeah, it’s a good question and it’s certainly, it’s a key judgment in the forecasts. This will sound a bit like a get out of jail free card, but we will find out as the data plays out. Yeah, look, I’m always thinking about the risks around the forecast, how things might play out differently. How would that manifest in the economy? What would that mean for the advice that I and the team are giving the Board? It’s certainly something we’re watching. Those two sectors in particular because you’re absolutely right, they are typically more persistent in terms of inflation than some of the other sectors. And they do give a really a very clear read on domestic capacity constraints, which is the thing we can tackle. So you know, we can’t tackle, can’t do anything really about international conditions. They are what they are. So I worry less about say all price movements than I do about the sectors you’ve highlighted. It’s certainly, it’s certainly on our minds and I mean, you know, we’re careful with our language. We do think that some of what we’ve seen is a sign of those more persistent pressures. That is reflected in the new forecast profile where inflation is higher than we thought in November, it’s higher again than we thought back in August. And that does reflect exactly what you’re talking about and yeah, but we’ll find out. I hope that inflation does track back down. It would be great if it tracked back down a bit sooner. That would be a very good outcome. But yeah, we’ll find out.

Curious as to whether the RBA is seeing any evidence around how much housing availability is affecting labour mobility and by extension labour costs if businesses are having to offer higher premiums for people?

Yeah, it’s a really good question. So it is something that sometimes comes up in some of our liaison conversations. So for those that don’t know, we run a liaison program where we interview or we hold about 900 interviews a year with organisations right across the country, across all sectors, not just businesses, but we talk to not-for-profits, other community organisations, industry bodies, government institutions. So a real broad gambit. We do hear from some of our contacts there, particularly in more regional and rural areas, that the sheer supply of housing is a challenge for getting labour into their business. So, you know, I’m in a rural area, there aren’t actually enough homes here to house people and I can’t expect someone to move to take a job with me if there’s nowhere for them to live. And so we do hear that that’s a challenge. We hear about people coming up with somewhat creative solutions to that as well. But yeah, it’s clearly a real issue that for some businesses is definitely a constraint on them getting the people that they need. The extent of how widespread it is, is really the question that we ask ourselves from a monetary policy perspective. And obviously, particularly in the larger cities, it’s not so extreme in that way. Housing is expensive, rents are high and rising, but there are homes available, actual physical homes available. But yeah, we do hear that and it does sort of come through in terms of those total labour costs that we track.

I’ll throw on to you then. Sarah, you’ve spent most of the week over here in wonderful Western Australia. How are you seeing conditions on the ground here and how is the RBA viewing the economy here in Western Australia and how is it different to the rest of the nation?

Yeah, thanks, Kaz. It’s been a lovely week. The weather’s been fantastic, I have to say. Really turned it on for me. Just perfect. Yeah, no, it’s been great being over here. So I flew in on Monday and I’m heading out tomorrow. It’s been interesting, sort of looking at the numbers from afar and then coming here and hearing it on the ground. Generally speaking, from afar, it looked as though the economy here was, if anything, a bit tighter than the national average. So the unemployment rate’s a little bit lower. I mean, that’s usually true for WA, but it looks like it’s a bit more true now than historically average. And we can see in terms of demand growth that the economy’s growing a bit more strongly than the national average as well. And the population growth might be a bit of a part of that. But generally speaking, it looked as though conditions here was stronger than in some of the other states. Having come here and had a few meetings and talking to lots of people, that definitely seems to be the actual lived experience. We were talking earlier on about the shortage of tradies. I’ve heard that from quite a few different organizations on the ground working in various different sectors. I’ve also heard a lot about the amount of work, the number of big projects that are in the pipeline across a number of different sectors and, you know, questions about how do we get it all done over the next few years. So it does feel like an economy that, if anything, is a bit tighter than the national average, like in the numbers. That seems to be what I’m hearing on the ground. The only final thing I’d say is that it’s not uncommon for that to be true. It’s actually really, really common for some parts of the country to be going a bit stronger than other parts. If someone’s strong, someone has to be, in a relative sense, a bit softer. You know, we’re setting policy for the aggregate, but it is interesting to see where are the pockets of particular pressure and WA does seem to be one of those at the moment.

Hi Sarah. We heard last year from the Governor in the Shann Lecture about how the Bank itself is using artificial intelligence.

I wonder if you might speak to your thinking on the structural trends and things in AI and how the Bank is taking account of that in the labour market, particularly on the demand side, modelling things?

Yeah, it’s a great question. And it’s obviously still a technology evolving incredibly rapidly. Like two or three years ago, probably most of us haven’t heard of ChatGPT and now it’s everywhere. But it’s still, I think, pretty early days for seeing what it means for the labour market. I think in the Shann Lecture the Governor talked about what’s likely to happen with a technology like AI, which is a generalist technology, and what economists mean by that is that the same technology can be used in a lot of different sectors right across the economy, as opposed to a specialist technology that might only have uses in one particular sector, like a particular piece of equipment or machinery that’s relevant for construction. You wouldn’t probably catch me using that in the office as I do my work. So generalist technologies, typically, what you’ll see is they do take some time to diffuse through the economy. This time could be quicker, but you’re still probably talking years, not months. And thinking back to, say, the personal computer revolution, they first sort of started to appear in the early 1980s, but it did take a solid 10 plus years, actually for most people to be using one in their work, and even longer than that to really mobilise the gains. So even if it’s quicker than that, even half the time, we’re still talking quite a few years. So I think we’re not seeing the impact yet in the labour market. And in terms of what it’s likely to do, I think that it will change the nature of the jobs that we have. Some of the tasks that we currently do, I think the AI will do them for us.

I think, and certainly hope that at least some of those tasks are the kind of boring stuff that’s a bit repetitive, bit too manual. And if AI is doing that rather than me or whoever else, and that’s generally a good thing. I think back to when I started my career, which is a fair few years ago now. One of the first things I had to do was construct a national accounts set for a country that I was working on as part of a project. You never have to do that these days because the information is electronic. When I say construct, I mean type it in from paper sheets by hand. You wouldn’t have to do that now. The technology would do so much of that manual work for you. It saves you bags of time and that’s great. That’s productivity growth right there. So I think we’re probably in that world in terms of it changing people’s jobs. Some of what we do is going to go away and disappear because technology will do it for us, and that’s great, but it’ll open up opportunities as well. And I think what can be tricky when you’re living it in real time is to figure out what the new jobs are. I think they will be created, they will exist. I don’t know what they are, though. And I think what’s going to be really important for individuals and for the country as a whole is to try and figure that out. So that we can make sure that we’re all equipped to pivot and move and evolve and make best use of the technology, know its strengths, know its limitations. If we can do that, then we will, we will really harness the productivity gains. But there’s a transition to be had and I don’t want to be too sort of rosy about it. The transition will mean some roles, at least the number of people doing that job, might grow more slowly because we don’t need as many people doing those types of roles. But I think other opportunities will open up and so the aggregate, it’ll just be a change in the makeup of the labour force.

Just a follow up to that. Are there concerns about those entry level roles and the skill development that we get, in a graduate role or when you’re constructing your national accounts and you’re learning a lot during the process that we don’t have that pathway with AI.

I think we’ve probably just got to figure out ways to make sure that as people enter the workforce and they’re building up their skills and experience, that it’s the right type of skill and experience-building that means that they can carry on in their careers. So if I carry on with my example, I’m not sure that I gained very much in terms of skills. I was very, very good with the number keypad on my keyboard by the end of that project. I did an awful lot of number typing. Not sure that’s the skill I need to perfect and hone. I’m still probably pretty good at it now, but, you know, I could probably do my job and not be so good at that. But the understanding that I got from doing it of how an economy is structured and, you know, how it sits together and how different sectors interact with one another, that is pretty crucial, right, for what I now do. And so I think to use that example, you want to keep the good. But perhaps there is some of this more manual work, repetitive work that we can let go of and that would be a good thing.

You’ve touched on a little bit about the global economy and essentially it surprised on the upside over the last year and we’ve seen that strength. How do you view that going forward? Still a fair bit of turmoil globally, politically and economically. Is that something that could change relatively quickly or how confident are you in that global future?

Yeah, it’s a good question. I think you’ll see in our latest Statement on Monetary Policy, we spend a fair amount of time talking about the global outlook. A couple of things that we’re monitoring quite closely. One, even though what’s happened over the last year has generally surprised us to the upside, there are definitely still risks that you’ve referred to. And so we’re definitely still monitoring those. And you know, we do have concerns that policy settings might shift so much that they’re potentially there is a correction in financial markets or potentially we do start to see some substantial real economy impacts. I think, even if we don’t get that sort of very, very bad downside case, and we did explore that in our May SMP if you want to go back and revisit, we’re also looking very closely to see what are the impacts of the shift in tariff policy settings, in particular on global trade flows and trading patterns and how they evolve over time. And so one thing we’re mindful of, it might be that there isn’t a sharp slowdown, but it could be just a sort of a drag on those trade flows and those trading patterns and that globalisation process over time. And so that manifests much more slowly year to year to year. But over time, if you aggregate it up, it then becomes substantial. So we’re certainly looking at things and we’re always monitoring these risks and they are definitely still there. But it’s just been really quite surprising over the last year how resilient the global economy has been.

And here in WA, the Chinese economy is by far our biggest trading partner and we feel some of those movements here. Do you have any particular views on the direction of the Chinese economy and how that’s holding up?

Yeah. So China, generally speaking, if you look over the last few years, the pace of growth there has gradually, and obviously look through the COVID disruption as well. But generally speaking it’s gradually slowed. We think that that’s likely to continue. We don’t know yet what the formal growth target for this calendar year is. That hasn’t been announced. But if we look at what the sort of major states and provinces over there are announcing, we think it’s going to be between 4.5 and 5. Our forecast for this year is 4.6 per cent growth. So it’s something in that ballpark and we’ll see what we get. So it’s that continuation of that moderation in the pace of growth. There are definitely risks in the Chinese economy. We can see that rates of inflation are very low over there. The private sector, in particular households, are still quite soft in their momentum relative to history and savings rate there is a bit elevated. So those sorts of signs of weak demand are certainly there. But equally the economy has been able to find some new export markets for its products. New products and new markets put together. So we can see it on the ground in Australia, Chinese electric vehicles in particular, but cars are now much more sighted on the roads. They’ve been building that export market for other products as well in the renewable energy space and even exporting steel which hasn’t been a traditional export product for them. But they are now finding markets for that. So it’s certainly a bit of a mixed picture. Often described as a two-speed economy. We’re monitoring it very closely, but our expectation is that growth would continue that gradual slowdown trend and we’ll wait and see what we get from policymakers.

I was just going to ask you to ask the same question about the US.

So the US is in terms of the upside surprise, over the last year the US as a single country has surprised more than anyone else. Growth in the US does look pretty robust. It’s an interesting mix of robust in terms of demand growth. But the labour market perhaps is softening there. So how do you sort of marry those two things together? Part of the marrying together actually is productivity. So we talked earlier about slowdown in productivity growth here in Australia. We’ve seen that in a number of countries around the world, number of advanced economies, but not really in the US recently they have been a bit of an exception to the rule. And so they’ve been able to sort of marry this not sharp slowing in their labour market but just softening in their labour market with continued strength and growth. And so how much of that continues, how much of it’s due to the AI boom? I think these are key questions for us but looking ahead with, you know, growth probably softens a little bit, but it’s, you know, it’s not a terrible outlook by any stretch of the imagination. In terms of what that means for Australia. They’re a relatively small export market for us. So directly, not a big impact on the economy here. Although for particular sectors they’re a large market, beef for example. It’s more what that would mean and how it spills back through the global economy. So what does that mean for East Asia in particular? Because that is our large market. That’s how we typically track it and think about it.

Just super quickly related to that one about the US dollar really. So that’s had its history as a world currency. It’s probably a difficult question whether the recent changes you see probably undermines or underpins a lot of their borrowing capacity as well from those current account deficits as well. How worried or how much of a risk do you think it is that that role starts to unwind as a world reserve currency … inaudible.

It’s certainly something that we’re, we’re thinking about and thinking about what it might mean. I think, to perhaps put some of the currency movements in perspective though, and some of the capital flow movements. It is true that there has been some shift in the flow, the destination for some of the capital flows, but there’s limited evidence of the stock of investments and capital allocation shifting. And it’s also true that some of the currency moves might well reflect some of those shifts in flow pattern. But again, that doesn’t necessarily mean the stock is changing. And some of the change, particularly for the Aussie dollar in recent weeks, as I’ve mentioned earlier, is actually, we think, related to shifts in policy rate expectations and expectations for the economy here. So it’s always really tricky with exchange rates and capital movements to unpack it all into nice discrete buckets and it’s rarely just one thing that’s pushing these flows around. So yeah, look, it’s something that we’re certainly looking at and monitoring and thinking about, but in terms of it happening very, very quickly, we don’t see evidence of that right now. But yeah, we’ll keep an eye on it for sure because as you very well pointed out, it does really matter for the global economy.

We’re almost out of time. One question to wrap up, Sarah. As we just had an interest rate decision and we kind of look forward to the next one, acknowledging … the economists in the room are definitely looking forward to it out of interest at least, you know, and acknowledging that you look very broadly around the economy when making these decisions. Are they particular indicators or sectors that you’re really going to be looking at over the next few weeks or months to get that idea about the direction of where things are heading?

Yeah, that’s a good question. I mean, I will, I guess I’ll start the answer with we really will look at everything pretty much and I won’t try and give the whole list of all the different data series and things that we track. But I think that the fundamental question that I’ll be pretty focused on is related to an answer earlier, actually. Just thinking about the domestic economy, that balance between demand, underlying demand in the economy and our supply capacity and how that’s manifesting in inflation and how much of the inflation that we’ve recently seen is temporary. I do think that is an absolutely critical question for us. But that doesn’t mean that we’ll stop looking at everything else. We will keep looking definitely at international conditions and how they’re evolving and considering that broader picture. But, yeah, I think that for the near term, that’s clearly near top of mind for us, because we really do need to understand that. And in understanding that, to take us all the way back to the speech, that will help us really understand the labour market and current labour market conditions. And what do we think that, in a broad sense, full employment looks like? Because that’s what the mandate is. So, yeah.