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Australian Economy to Grow Close to Capacity, RBA’s Lowe Says

Australia Inflation May Be Stoked by Consumer Surge
Reserve Bank of Australia Assistant Governor Philip Lowe speaking in Sydney. Photographer: Sergio Dionisio/Bloomberg

Australia’s economy will grow at close to full speed, driving down the jobless rate to a level consistent with “full employment,” said central bank Assistant Governor Philip Lowe.

“For the next year I think we’ll be travelling along pretty much close to full capacity, but probably just a little under it,” Lowe said in response to questions at a conference in Sydney today. “My judgment would be we’re almost at what would be considered full employment.”

The Reserve Bank of Australia has led Group of 20 members by raising borrowing costs six times between October and May, as a mining investment boom drives down unemployment to almost half the level of the U.S. There is a risk inflation will accelerate in Australia if household spending strengthens from its current “relatively restrained” level in coming years, the assistant governor said.

Lowe used his speech to “highlight the lack of spare capacity in the economy,” said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. “As the global economic recovery gains traction it is likely that labor shortages -- particularly in mining and construction -- will become more prominent.”

“If the jobs can’t be filled here in Australia, business should be allowed to hire workers from abroad,” James said.

The Australian dollar traded within 2 U.S. cents of its strongest since July 2008, after gaining 11 percent this quarter. It bought 93.39 U.S. cents at 3:46 p.m. in Sydney and reached as high as 94.58 cents on Sept. 14.

Inflation Pressure

“Given that there is currently a relatively limited amount of spare capacity in the economy, the risk of upwards pressure on inflation would be increased if investment and consumption were both to increase very strongly over the next few years,” Lowe, who heads the central bank’s economics department, told the conference organized by Australia’s statistics bureau.

“Household spending has been relatively restrained over the past couple of years and the appetite for debt has declined,” said Lowe.

“One interpretation of this is that the household sector, after having increased its debt levels for many years and witnessed the problems elsewhere in the world, has a better appreciation of the risks,” he said.

Rate Bets

Investors increased bets that policy makers will resume raising borrowing costs in coming months after the bank left its benchmark interest rate at 4.5 percent on Sept. 7, saying the rate was appropriate “for the time being.”

There is a 60 percent chance of a quarter-percentage-point increase in the overnight cash rate target by early December, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 3:23 p.m. today. Prior to this month’s policy meeting, chances of an increase stood at zero.

“As is now well understood, Australia has come through the global downturn in good shape,” Lowe said today. “Not only has the business cycle here been relatively muted compared with elsewhere, but our medium-term prospects look to be brighter than those of most other advanced economies.”

Shipments of iron ore and coal to China helped the economy expand the most in three years last quarter and drive the jobless rate down to 5.1 percent in August, matching the lowest level since January 2009, reports showed this month.

China’s Growth

Lowe said a key change in the last decade has been the degree to which Australia’s economy mirrors changes in China’s growth, while the correlation between local gross domestic product and that of the U.S. has fallen.

“Clearly what happens in the Australian economy is now more dependent upon what happens in China than has been the case at any time in our past,” he said. China is Australia’s largest trade partner.

That nation’s urbanization has seen nearly 400 million people move to cities from rural areas in the past 30 years, with another 300 million to 400 million expected to move over the next 20 years, the assistant governor said.

Such developments help spur demand for raw materials, particularly steel to build new apartments. “A typical 90-square-meter apartment in China requires about six tonnes of steel, and 10 kilometers of metropolitan subway require around 75,000 tonnes,” Lowe said.

China’s example also “hints at the potential growth in India,” one of Australia’s four biggest export markets in 2009, next to Japan and South Korea, he said.

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