Australia’s strong currency, a deceleration in resource investment from a peak this year, and tightening of government spending are likely to hurt growth in 2013, central bank Assistant Governor Christopher Kent said.
“The peak in resources investment is now close,” Kent said in a speech to the Bloomberg Economic Summit in Sydney today. “Once it has passed, the decline in mining investment -- and the effect of the still high level of the exchange rate and ongoing fiscal consolidation -- will weigh on economic growth.”
The Reserve Bank of Australia lowered the benchmark interest rate by 1.75 percentage points in the 14 months through December as it seek to rebalance a two-speed economy away from mining regions in the north and west toward industries including construction in the south and east. The currency has held above parity with the U.S. dollar for more than nine months, the longest stretch since it was freely floated in 1983, and a private report today showed consumer confidence fell this month.
“There has been a significant easing in monetary policy,” Kent said today. “There are signs that the low level of interest rates is having some of the expected effects and these are likely to have further to run. The effects are clearly evident in the established housing market.”
Responding to a question on the currency’s strength, Kent said the RBA has tried to take that into account in the setting of monetary policy.
“We’ve reduced interest rates more than we would have otherwise if the exchange rate hadn’t been so high,” he said. “So those are the settings we have. That’s the hand that the world has dealt us and we’re doing the best we can.”
The Australian dollar, together with the New Zealand, Canadian, Swedish and other currencies, has strengthened as nations such as the U.S., Japan and the U.K. hold rates near zero and undertake quantitative easing to boost their economies.
Asked whether the central bank would be prepared to consider intervention in the currency markets to weaken the Australian dollar, Kent reiterated Governor Glenn Stevens’s comments to a parliamentary panel in February.
“The system we have in place is one that has served us pretty well for quite a while,” Kent said today. “We’re really quite a long way from having to consider those sort of more extreme measures, including because interest rates in Australia are at reasonable levels compared to elsewhere. So there’s room to cut should that be necessary.”
The central bank has kept rates unchanged this year at 3 percent, matching a half-century low, as data indicate that the earlier reductions in borrowing costs are gaining traction.
“Higher consumption growth will also help to support business activity and investment,” Kent said. Better conditions in the housing market and a pickup in dwelling investment “should, in time, provide a measure of support to employment and activity in the non-mining business sector,” he said.
A Westpac Banking Corp. (WBC) report today showed consumer sentiment declined 5.1 percent in April, after three months of increases. “This result emphasizes how fragile consumer confidence has become in the current environment,” said Bill Evans, chief economist at Westpac.
Demand from China, Australia’s biggest trading partner, for iron ore and coal has fueled the resource investment boom. Prices of Australia’s key export, iron ore, rebounded since reaching a three-year low in September.
Exports of bulk commodities have been growing strongly and shipments of liquefied natural gas are forecast to increase “very significantly” as new production plants come on line from about 2015, Kent said.
“While this welcome boost to exports will help to support growth of GDP, the demand for labor in resource and resource- related activities should wane as the sector moves from the investment to the operational, and less labor intensive, phase of the boom,” he said.
A central bank paper released in February showed that one in 10 Australian jobs is tied to resource extraction and industries that service it. The share of total employment in the resource economy is estimated to have doubled since the mid-2000s to about 9.75 percent in the 12 months through June 30.
“While the exact timing of the peak in mining investment and the profile thereafter are uncertain, there is still a sizeable amount of work in the pipeline, including a number of large liquefied natural gas projects,” Kent said today. “This means that the level of mining investment is likely to remain quite elevated for a time.”
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