Friday, February 5, 2016

RBA cautiously upbeat on economy but says China remains flashpoint

The Reserve Bank has delivered a cautiously upbeat report card on the Australian economy in the face of global financial turmoil.

But the RBA has repeated that despite local optimism, uncertainly about the outlook for China and the management of its economic slowdown remains a potential global flashpoint.

In its quarterly economic snapshot released today, the central bank has signalled qualified optimism about the local outlook given a falling jobless rate, low inflation, a lower Australian dollar and evidence the transition out of the mining boom is starting to take hold.

"Non-mining business investment is forecast to pick up in the second half of the forecast period, reflecting the improvement in domestic demand," today's statement says.

"There has been a noticeable improvement in labour market conditions that was not anticipated at the time of the previous statement.

The official unemployment rate for December fell to 5.8 percent after peaking at 6.3 percent during 2015, down by 0.5 percent.

"Also the low growth of wages is likely to have encouraged businesses to employ more people than otherwise," the RBA says.

The RBA also points to low headline and underlying inflation in addition to lower petrol prices caused by the plunge in global oil prices.

The outlook makes no material change to to economic growth outlook which it expects to increase gradually over the next two years to "be a bit above the decade average."

The RBA expects growth remain steady at between 2.5 and 3.5% to December 2016, slightly better that the forecast in November with headline inflation of between 2 and 3 percent for the same period.

However, the RBA says uncertainty about China and concerns about its economy remain a key focus for Australia.

"The outlook for China continues to be a key source of uncertainty for the forecasts," the RBA says.

"The recent bout of global financial market volatility has been characterised in part by concerns about the evolving balance of risks in China and the ability of Chinese authorities to manage a challenging economic transition.

"Any sharp slowing in economic activity in increase in the financial stresses in China could spill over to other economies in the region."

The RBA has warned that any unexpected fallout from China would "adversely affect commodity prices including those that are important to Australia" such as iron ore.

While plunging oil prices have damaged the balance sheets of global giants like BP and Royal Dutch Shell, the RBA believes lower oil prices will continue to support growth in Australia's major trading partners.

The RBA repeated the easing bias contained in Tuesday's interest rate decision when the cash rate was left steady at the historic low of two percent.

"Continued low inflation may provide scope for easier policy should that be appropriate to lend support to demand."

The RBA has also noted that significant steam appears to gone out of the hot real estate markets in Sydney and Melbourne.

It says building approvals have declined but remain at still high levels while housing prices "have declined a little" and auction rates have fallen.

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