March 26 (Bloomberg) -- Reserve Bank of Australia Governor Glenn Stevens said there are encouraging early signs of a handover from mining-led demand growth to domestic consumption and the nation’s economy may strengthen later this year.
“This outlook is, obviously, a balance between the large negative force of declining mining investment and, working the other way, the likely pick up in some other areas of demand helped by very low interest rates,” Stevens said in the text of a speech in Hong Kong. “The lower exchange rate since last April and the improved economic conditions overseas also help.”
The governor reiterated warnings to property investors delivered in the RBA’s semi-annual financial stability review earlier today about speculative buying and increased leverage. “We are watching this closely, and we remind people that house prices can go down as well as up,” he said in the address.
The Australian dollar rose as high as 91.84 U.S. cents, the strongest since Nov. 26, before trading at 91.73 cents at 2:49 p.m. in Sydney.
Markets and economists predict the central bank will likely leave interest rates unchanged this year to avoid a growth gap emerging as mining companies plan fewer projects. Stevens repeated today that borrowing costs, currently at a record-low 2.5 percent, were likely to remain steady for a period, as he seeks to encourage household consumption and residential construction.
“It is clear that dwelling construction activity will rise strongly over the period ahead,” Stevens told the Credit Suisse Asian Investment Conference. “Businesses seem, so far, to be taking a cautious approach to investment, however: they are waiting for stronger, more persistent signals of improved conditions before committing to significant increases in capital expenditure.”
About 50,000 jobs in the auto and parts industry are in jeopardy after Toyota Motor Corp. last month followed General Motors Co. and Ford Motor Co. in announcing plans to quit manufacturing in the country. The nation’s unemployment rate currently stands at a more than 10-year high of 6 percent.
“Unemployment has been rising, and will probably rise a bit further yet; growth in labor costs have slowed noticeably in response,” Stevens said. “ So absent continually rising profit margins on the part of businesses, we don’t see the conditions for persistently higher consumer price inflation.”
On China, Australia’s biggest trading partner, Stevens said recent indicators showed “possible signs of slower growth in the early part of 2014.” At the same time, he said analysts may be “too inclined to fret over what are still relatively small movements in monthly PMIs and the like in China.”
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