RBA bullish on economy despite housing and debt risks

Reserve Bank governor Philip Lowe is confident that Australia will experience stronger growth over the coming years but says house prices, rising debt levels and stagnant wage growth are a worry.

Speaking on a panel at the Australian National University's Crawford Australian Leadership Forum in Canberra yesterday, Mr Lowe said there is still “plenty of scar tissue” a decade after the financial crisis.

“We are in a better position than we have been for some time,” Mr Lowe said. “To be clear, we are not talking about a boom and there are still plenty of risks out there. But globally things are better. Animal spirits have been missing for quite a while and they might just be starting to come back,” he said.

The RBA governor believes Australia’s economic growth over the next couple of years will be “a bit stronger” than it has been recently, driven by a pick-up in the global economy.

“The return of mining investment to more normal levels is almost complete. Monetary policy continues to provide support and survey-based measures of business conditions have improved noticeably. Employment growth has also strengthened over recent months. These are all positive developments,” he said.

However, Mr Lowe warned that headwinds persist around income growth and housing risks.

“Households are gradually coming to grips with slower growth in their real incomes. Growth in wages is unusually low, average hours worked have declined and the nature of employment is changing,” he said, adding that there is “a recalibration of expectations” going on.

“Many households are also coming to grips with higher debt levels and, in our largest cities, high housing prices. We need to watch these issues carefully.”

One issue that appears to be piquing the governor’s interest is demographics, specifically the ageing population in some APAC nations.

Mr Lowe observed that many developed economies, as well as China and Korea, face big demographic challenges.

“Populations are stagnant or declining. They are also ageing. Older societies want to save, rather than invest, especially so when there will be fewer people tomorrow than there are today. And older societies are likely to be more risk averse. So this is a major issue.”

[Related: Housing sentiment hits record low: CoreLogic]

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