The Reserve Bank says record low interest rates are having a positive effect on the economy, but the full benefits may not be seen until well into 2015.
In its latest quarterly Statement on Monetary Policy, the RBA says variable borrowing rates are now below their 2009 financial crisis lows, after the most recent move to cut official rates to 2.5 per cent in August.
Despite the record low lending rates, the bank has slightly lowered its economic forecasts for next year, and expects growth to remain below average throughout 2014 due to a bigger than previously expected fall in mining investment.
It expects growth at between 2 per cent and 2 per cent in 2014. In its August statement, it tipped growth at between 2.25 per cent 3.25 and per cent next year.
“The latest liaison information points to a more pronounced fall in mining investment over 2014, with some large projects delayed or looking less likely to proceed,” the RBA noted in today’s statement.
In particular, the bank points to a significant fall in investment plans for the coal sector. Furthermore, the recent rebound in the Australian dollar, combined with expectations of tight federal and state government budgets and slow wage growth, leaves the Reserve Bank expecting the improvement in consumer and business confidence will take some time to feed through into significantly higher spending and non-mining investment.
“This pick-up in demand [from households], and the improvement in consumer and business sentiment, is expected to flow through to stronger non-mining business investment, which would contribute to higher GDP growth over 2015,” the bank added.
The RBA notes that if the housing market strengthens more substantially, the associated boost to wealth and sentiment could result in lower savings levels and a bigger than expected boost to consumption.
However, it also warns that if such a boost led to more household borrowing and a rise in indebtedness, then this could raise concerns around financial stability.
Employment tipped to rise If the improvement in Australian economic growth back to average levels will likely take until 2015, the bank says an improvement in the jobs market will probably take even longer.
“Unemployment is anticipated to continue to increase gradually for the next year or so as the economy grows at a below-trend pace,” the bank forecast. “Later in 2015, the improvement in non-resource activity is expected to see employment growth pick up and unemployment begin to decline.”
Bureau of Statistics employment figures released yesterday confirmed this trend, with very low job creation resulting in a rise in the jobless rate to 5.7 per cent, seasonally adjusted.
However, the RBA says the good news in more detailed employment figures is that long-term joblessness has remained relatively steady, meaning that as the economy improves, the unemployment rate should follow.
“Most of the recent rise in the unemployment rate has been attributable to individuals that have been unemployed between four and 51 weeks, who are more likely to be unemployed for cyclical reasons,” the bank observed.
A graph in the statement reveals a strong rise in the number of people who left their job involuntarily (because they were sacked, made redundant or their employer closed down) has driven the bulk of the increase in unemployment.
However, one disturbing trend is a recent steep rise in people who are unemployed and have never worked.
This indicates a lot of people coming out of education are having difficulty securing their first job, and would be one of the key factors behind the relatively high youth unemployment rate seen in yesterday’s ABS figures.
Overseas optimism The RBA is perhaps a little more upbeat on the overseas outlook, which it sees as improving noticeably next year.
Australian trading partner economic growth is forecast to go from just below its recent average of 4 per cent this year, to just above average at 4.25 per cent next year.
The RBA expects the US economy to continue gathering momentum over 2014, and that view seems supported by US economic growth figures released overnight which easily beat expectations.
Although, the bank does warn that considerable uncertainties remain over the lingering US debt ceiling and budget disputes, and the timing and speed of the Federal Reserve’s withdrawal of its money printing stimulus, which is widely expected to start around March or April next year.
The Reserve also expects economic growth to resume in Europe in 2014, even if it remains weak. This view would no doubt be strengthened by the European Central Bank’s decision overnight to lower interest rates even further to just 0.25 per cent in an attempt to ensure the emerging shoots of recovery do not get frost bitten over the European winter.