As per Philip Lowe, the Governor of the Reserve Bank of Australia, the global economy seems to be on a steadier track compared a year-ago scenario, with growth target for 2016 being achieved in China and improved economic position in the United States, while Europe continues to sail on a recovery platform. Although broader picture has improved, risks do prevail going forward. Turning to Australia, the Governor did highlight that the target figure for Australian economy to grow by around 2½–3 per cent in 2016 does not look to be a possible figure to achieve and the outcome is now expected to be around 2 per cent. However, the Australian economy is expected to grow by around 3 per cent this year and next, at the back of the commodity price uplift witnessed in the middle of 2016.
An upside momentum has been seen in terms of investment in New South Wales and Victoria while the slowing down of the mining investment boom continued to affect the overall business climate. However, with a reversal in the declining mining investment, a broader pick-up over time seems to be playing a role going forward. With regards to the grey area pertaining to residential construction activity, there have been concerns over Australia’s rate of new building approvals that has slowed down over time. However, growth is expected to be backed by work in pipeline. Coming to consumer prices, RBA had expected the inflation rate to remain above 2 per cent during 2016, but this was just around 1½ per cent. Wage growth has also been quite subdued. Overall, the subdued outcomes are still expected to prevail for a while before a change could be noted.
Lowe has stressed multiple times on the limits to monetary policy while stating that further cuts in interest rates would be against the national interest. Nonetheless, it is prudent to note that further slowdown in labour market could still weigh on the interest rates. Further, one cannot ignore the risk of rising household indebtedness in Australia that has started affecting spending. The Reserve Bank thus stated to continually put in efforts to balance these various issues within the framework of flexible medium-term inflation target.
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