There’a another speech today by the RBA, with Deputy Governor Phil Lowe addressing CEDA on the forces driving the economy in the year ahead. It’s fairly run-of-the-mill stuff: structural adjustment, high exchange rate, mining boom, tradeables and housing weakness etc.
Two parts of the speech caught my eye. The first was the section on risks, which focussed entirely on Europe and the fallout from fiscal tightening in the US. Perhaps it is just that I’ve been writing on iron ore this morning, but I would have thought that China was worth a bit more than the below:
The Chinese economy is also continuing to grow solidly. The pace of growth has slowed, but it has done so in line with the authorities’ intentions. Inflation in China has also moderated. Across the rest of east Asia, the recent data have been mixed. Nevertheless, for the region as a whole, growth in 2012 is expected to be around trend, with domestic demand likely to play a more important role in generating growth than it has for most of the past two decades.
I’m a China bull in the long term but even I find this bizarrely short shrift if we’re discussing the prospects for the Australian economy in 2012. The RBA doesn’t really want to encourage further its already extreme “China bullish” reputation does it? I would have thought that even if the RBA sees China navigating its property bubble busting excersize well, some explanation as to why would be useful.
The second part of the speech worth mentioning was the section on inflation and the exchange rate:
One interesting aspect of the recent inflation data is the divergent trends in the prices of internationally traded items and the prices of goods and services that are not internationally traded (Graph 8). Over recent times, the prices of non-traded goods and services have been increasing at a fairly firm pace, although down markedly from the rates in 2007 and 2008. The overall CPI inflation rate has, however, been held down by a decline in the prices of tradable goods as a result of the exchange rate appreciation. But the prices of these goods are unlikely to continue to fall over the medium term, particularly as the effects of the exchange rate appreciation dissipate. As a result, some slowing in the rate of increase in the prices of non-tradables is likely to be required at some point for overall inflation to remain consistent with the mid-point of the target range.
While we cannot be sure that non-tradables inflation will moderate, there are reasonable prospects that it will do so. The Bank is expecting a modest pick-up in productivity growth over the period ahead from the low rates of recent years, as well as a slight moderation in wage growth. Together, these developments would help lessen cost pressures in the economy and thus see some slowing in the rate of nontradables inflation. In the event that they did not occur, it is likely that non-tradables inflation would be uncomfortably high.
I agree with this assessment of productivity, as I’ve written before. Even more so with the forecast of weaker wage pressures. Full speech below.