Interest Rates Australia

Reserve Bank governor optimistic, despite slow wage growth, growing debt and rising rates

www.first2move.com.au 

Reserve Bank governor Philip Lowe is optimistic Australia's economy is on the path to a new post-mining growth phase, despite the challenges of weak wages growth, record-and-still-rising debt, and looming interest rate increases.

Speaking in Perth about "the next chapter" in Australia's economic development, Dr Lowe said the mining investment downturn was almost over, but Australia would need to look for new innovate industries to compete globally.

"If we are to take advantage of the opportunities that are offered by technology and growth in Asia, we need a flexible workforce with strong skills in the areas of problem solving, critical thinking and communication," he advised.

"Investment in human capital will be one of the keys to success."

The most positive sign is that investment in non-human capital — that is equipment, machinery, buildings and infrastructure — has now turned a corner, growing 10 per cent outside the mining sector over the past year.

"For a number of years, animal spirits had been missing, with many firms preferring to put off making decisions about capital spending," Dr Lowe observed.

"It appears that some of this reluctance to invest is now passing."

That fed through to strong employment growth, with the number of people with jobs growing by 2.5 per cent over the past year, easily exceeding population growth.

However, even though full-time employment is growing, it is not flowing through to pay increases.

"Over the past four years, the increase in average hourly earnings has been the slowest since at least the mid-1960s," Dr Lowe said.

"This is partly a consequence of the unwinding of the mining boom but there are structural factors at work as well.

"The slow growth in wages is putting a strain on household budgets and contributing to low rates of inflation."

The other big strain on household budgets and spending is a record level of household — mainly housing — debt, which is now more than 190 per cent of household incomes.

"Australians are coping well with the higher level of debt, but as debt levels have increased relative to our incomes so too have the medium-term risks," Dr Lowe said.

One of those risks is rising interest rates, as global central banks unwind their post-financial-crisis emergency stimulus programs.

"This period of monetary expansion is now drawing to a close," Dr Lowe said.

"Periods of rising interest rates globally have, historically, exposed over-borrowing somewhere in the global system.

(Source: Australian Broadcasting Corporation )