- Unlikely that growth will come from higher terms of trade
- Falling A$ playing important role in economy's adjustment
Australia will need to boost its productivity through a more flexible economy if it wants to increase living standards rather than relying on any renewed lift in export prices or lower interest rates, Australian central bank Deputy Governor Philip Lowe said.
Acknowledging that the central bank’s rate settings are unlikely to affect the pace of improvement in living standards, Lowe said in the text of a speech in Sydney Tuesday that competition policy, reward for innovation, a responsive labor market and education system are important in creating a flexible economy.
“The rate at which our living standards improve is unlikely to be driven by the actions of the central bank,” Lowe said. “Instead, the improvement in our living standards rests on our ability to improve our fundamentals and enhance the flexibility of our economy.”
Australia’s central bank has said it is content with interest rates where they are after reducing the benchmark to a record low 2 percent in May. The country’s jobless rate has stabilized at just over six percent and housing construction has jumped, but businesses remain reluctant to spend and private-sector investment is forecast to fall 23 percent in the year through June 2016.
“I think interest rates are probably less effective than they used to be,” Lowe said in answer to a question after his speech. “The household sector are really using the lower interest rates not to increase their consumption but to try to pay back their debt a bit more quickly.”
Lowe said monetary policy is still effective, which can be seen in a pick up in residential construction and an impact on the exchange rate. Still, “interest rates are not the source of long-term growth in living standards,” he said in response to the question. “Ideally, what we want is a world in which interest rates rise.”
There has been very little growth in income per person in Australia since 2008, which likely “lies at the heart of some of the recent soul searching about the future of the Australian economy,” he said. Australia needs to be careful that uncertainty about the future “does not mutate into chronic pessimism.”
Australia’s terms of trade, or export prices relative to import prices, dropped 3.4 percent in the second quarter and are down 30 percent from their 2011 peak, reflecting the country’s dependence on China, which is going through its own economic transition.
While China’s latest purchasing managers index climbed to 49.8 in September from 49.7 in August, excess capacity and factory-gate deflation are pressuring the country’s manufacturers, adding headwinds for the government’s 2015 growth objective of about 7 percent.
Australia’s flexible exchange rate “has arguably been the single most stabilizing influence on our economy,” Lowe said. “In particular, the depreciation over the past couple of years is playing an important role in helping the economy adjust to the wind-down of the boom in mining investment.”
Traders are pricing in a 35 percent chance of another rate cut by December as Australia, the developed world’s most China-dependent economy, struggles to cope with slumping prices for key resource exports.