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The RBA Governor Says the Economy is on the Mend

In what has become an annual event the Governor of the Reserve Bank, Dr. Phillip Lowe, made his first speech of the year to the National Press Club in Sydney, on Wednesday. He indicated from the start of his speech that he was optimistic that the economy was beginning to grow at a faster rate and added that global interest rates would stay low for some time to come.

He said that the Reserve Bank was forecasting that the economy would grow by 2.75% in 2020/21 and 3% in 2021/22. He emphasised that at the moment Australia was creating jobs at a faster rate than any other developed country, asset prices were growing, and household debt was being reduced because of the low interest rates. He was confident that at some point in the near future consumers would feel confident enough to start spending again. He also pointed out that mining investment was coming back and that public sector investment in infrastructure was stimulating the economy.

Dr. Lowe admitted that the economy would take a hit from the drought and the coronavirus and would probably contract by 0.5% over the first two quarters of 2020 but would bounce back in the second half of the year.

On the other hand the Governor did not think that the bush fires would have an impact on the economy as a whole, as opposed to the locations that were directly affected. This is because the money to be spent by governments and insurance companies on the recovery process will offset the losses from the drought, fires and the coronavirus.

Dr Lowe was emphatic that if we want to continue our economic growth into the medium term we have improve our productivity. He made it clear that this required productivity enhancing private and public investment. The Governor indicated that the investment could flow to infrastructure, human capital, technology, research and development and climate change risk management activities.

In his column in Wednesday’s ‘Australian’ Robert Gottliebsen said that the current crises represented an opportunity for Scott Morrison to lead the country into a new era of economic growth and prosperity. He says that the Government should spend the budget surplus and more on the investments that the Reserve Bank Governor has alluded to.

Gottliebsen also makes the point that the coronavirus epidemic in China started in a food market. The Chinese are deeply suspicious of food that is not demonstrably clean and green. He argues that this suspicion will create enormous opportunities for Australian farmers.

In order to meet demand from China, Australian agricultural areas such as Gippsland and the Murray Darling Basin will have to be rehabilitated as quickly as possible. In order to get more water into the Murray Darling system surplus water needs to be brought south from Queensland. The technology exists to do this and could be part of establishing Australia’s adaptation to climate change.

In the meantime Dr. Lowe was non-committal on whether there would be a further interest rate cut. He said that a case could be made for more monetary stimulus to encourage consumption and investment but there was also a risk that lower rates could encourage households to get into more debt and to make unproductive investments in property which would undermine an economic recovery.

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