Reserve Bank governor Glenn Stevens says that while non-mining investment has been very low, he believes it will pick up at some stage.
Stevens on Friday told federal politicians of the House Economics Committee that this week’s national accounts for the December quarter showing annual growth at 2.8 per cent was roughly in line with the central bank’s forecast.
“For some time, our view has been that growth has been running below its trend pace,” he said in his opening statement.
“The national accounts released a couple of days ago don’t significantly change that assessment.”
He said the drivers of growth were shifting and the decline in investment spending by mining companies would accelerate over the coming year.
“Business investment spending outside mining, which has been very low indeed, is bound to pick up at some stage,” he said.
He said dwelling investment activity would, clearly, rise strongly over the period ahead.
The public hearing was the first of two he makes each year.
Stevens said while inflation is not quite as low as it might have looked six to 12 months ago, he does not believe it is accelerating to the extent a literal reading of the latest data might suggests.
The consumer price index jumped to 2.7 per cent over 2013, while underlying inflation rose to 2.6 per cent, albeit remaining within the central bank’s two to three per cent inflation target.
He said there could have been as “element of noise” in the December quarter data.
“The general situation – 18 months of below-trend growth, a rise in unemployment, a marked slowdown in wages – is not one that would be obviously associated with a sustained rise in price pressures,” Mr Stevens said.
“Our view remains that the outlook for inflation, while a little higher than before, is still consistent with the medium-term target.”
Stevens said the labour market will probably remain soft for a while yet, given that it lags changes in activity.
However, he said some forward indicators have stabilised and then improved a little of late, “which is promising”.
He said at the present time the central bank has judged monetary policy is doing the things it can reasonably be expected to do in the circumstances facing the economy.
“We have signalled the likelihood, if the economy evolves more or less as expected, of a period of stability in the cash rate,” Mr Stevens said.
“As well as the low level of interest rates generally, a sense of stability should be of some help for businesses and households as they form their plans.”
However, he said the outlook contains many uncertainties, not least the `hand over’ from resources investment spending to sources of demand outside mining.
“In some important respects, the basis for such a handover is coming into place,” he said.
But he said it was uncertain whether this additional demand will be the right amount to offset the large decline in mining investment spending, “so keeping the economy near full employment”.
He said Australia’s terms of trade have been little changed over the past year, though the bank still assumes they will decline further in the future.
On the global economy, he said growth in 2014 is expected to inch higher compared to 2013 and at about average pace.
He noted that more growth is coming from the advanced countries, but less so from emerging ones.
He said this is probably a welcome re-balancing after the weakness of the advanced countries in recent years.
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