Photographer: Brendon Thorne/Bloomberg

RBA Highlights Better Global Outlook, Limited Employment Gains

Australia’s central bank highlighted an improved global picture for the small open economy, while seeing limited employment gains because any growth will be labor light.

In its quarterly update of forecasts released Friday, the Reserve Bank of Australia left inflation estimates broadly unchanged, while growth in the year to June 2017 was cut by 1 percentage point due to a “base effect” from a third-quarter contraction. Liquefied natural gas exports are predicted to add about half a percentage point to GDP growth in 2017 and 2018.

“Overall growth is not expected to be sufficient to generate much of a decline in the unemployment rate over the forecast period,” the RBA said in its Statement on Monetary Policy. The nation’s jobless rate was 5.8 percent in December.

An unexpected bounce in commodity prices from stronger growth in chief trading partner China and a better performance in developed nations has lifted Australia’s terms of trade by 15 percent since mid-2016. While that’s forecast to unwind, the levels are forecast to remain above the lows of a year ago.

The Australian dollar was little changed after the report. It bought 76.22 U.S. cents at 11:38 a.m. in Sydney compared with

76.21 before its release.

Higher commodity prices are “not expected to translate into materially higher investment or employment in the resources sector,” the RBA said. “Some of the additional income is likely to accrue to foreign shareholders of resource firms; the proportions received by domestic shareholders and governments are unlikely to add much to domestic demand.”

China’s “policy-induced rebound” in residential investment boosted demand for steel and hence Australian iron ore and coal. But high and rising debt combined with excess capacity in some areas remains a risk to China’s medium-term growth outlook, the RBA said. Near-term growth is expected to be supported in the lead up to the 19th National Congress of the Communist Party of China in the second half of this year.

Consumption Growth

As to Australian households, the central bank said the profile of consumption growth “has been revised a little lower” as it’s unlikely to run much ahead of income growth. “This implies that the saving ratio will be relatively stable, rather than continuing to decline, as previously assumed,” the central bank said.

This is unexpected as the RBA cut the benchmark interest rate to a record-low 1.5 percent in August and house prices in Sydney and Melbourne have surged, meaning cheap money and a wealth effect are failing to spur consumers.

On the property market, the central bank noted the unexpected decline in dwelling investment in the third quarter was a reflection of bad weather, while the large amount of work in the pipeline suggests dwelling investment will remain high for the next year or so.

Spare Capacity

The RBA said the current level of unemployment suggests there’s “still a degree of spare capacity” in the labor market, which has contributed to weak wage growth. “More recently, there has been some evidence from surveys and liaison with firms suggesting that wage growth is unlikely to ease further.”

The statement used the same language on the currency as recent months and gave no guidance on the direction of policy -- though Governor Philip Lowe’s comments in a speech Thursday night suggested he doesn’t want to ease further.

As to the elephant in the global picture, President Donald Trump, the central bank said there “remains considerable uncertainty” about his plans.

It said cuts in personal and corporate taxes are likely and could boost growth in the U.S. at a time when it has little spare capacity in the labor market, increasing inflation that could spill over into faster growth and higher consumer-price gains in other economies.

“However, there is a rising risk that more restrictive and protectionist trade and immigration policies under the new administration could harm global growth prospects,” it said.

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