SYDNEY, Feb 18 (Reuters) - A top Australian central banker painted a bright outlook for the economy on Thursday and brushed aside concerns that the winding back of fiscal stimulus would restrain activity going forward.
Reserve Bank of Australia (RBA) Assistant Governor Philip Lowe also played down fears that China's tightening of credit would threaten its recovery and foresaw strong growth in Asia making up for weakness in the developed world.
Speaking at an economics conference, Lowe said the central bank expected Australia to grow by 3.25 to 3.5 percent this year and next, up from an estimated 2.0 percent in 2009.
'This is slightly above the average of the past two decades and, if it occurred, would likely see a gradual reduction in the spare capacity that currently exists,' said Lowe, who heads the central bank's economics department.
Lowe did not touch on monetary policy except to say the bank's forecasts were based on the assumption that the official cash rate had been a long way below normal and would return to more normal levels over time.
The RBA slashed its cash rate to a record low of 3.0 percent at the height of the global credit crunch before lifting it to 3.75 percent in the last three months of 2009.
It had been expected to hike again this month but surprised by holding rates steady, saying it wanted more time to assess the impact of its previous tightening.
Lowe said the bank's upbeat outlook was based on a judgment that growth in private demand will gradually strengthen, with public demand providing support in the short term.
Lowe singled out the labour market as a star performer with unemployment having peaked at 5.75 percent, far lower than first feared. He cited greater flexibility in the labour market as one reason for this, with employers and workers agreeing to cut hours or pay as a way of preserving jobs during the downturn.
He played down fears that China's steps to tighten lending would lead to a significant slowdown in the economy there, something that has been weighing on the Australian dollar.
'On balance, it is plausible to argue that the recent tightening in credit conditions is a favourable development in that it increases the likelihood that the Chinese economy is on a sustainable path,' said Lowe.
Indeed, he expected Asia in general to keep growing strongly but subdued activity in Europe and the United States.
That is crucial for Australia since Asia takes 70 percent of its exports. China is now its biggest trading partner, with an insatiable demand for commodities that has helped push up the prices of iron ore and coal, Australia's two biggest exports.
This was a major reason Lowe expected a strong increase in Australia's terms of trade -- what it gets for exports compared to what it pays for imports -- this year.
That in turn was fuelling a boom in investment in Australia's resource sector where many billions of dollars were being spent on mines and liquefied natural gas projects.
All of which helped counter concerns that the rollback of fiscal stimulus, such as grants for first-time home buyers, would lead to a fall off in economic activity, said Lowe.
'Looking forward, there remains some possibility that, with these measures now having been wound back, activity could again slow,' said Lowe. 'However, as time has passed, the likelihood of this being the case has declined.'
He cited evidence that spending on services, such as eating out, had been particularly strong in recent months, which as unlikely to be the result of fiscal measures.
Still, Lowe did note that the global credit crisis had made consumers and businesses more conservative in their spending plans despite being generally confident about the future.
'As we go forward, one of the things that will shape how the economy evolves is how these attitudes change,' he said.
The financial crisis had also impacted the demand and supply of business credit, which had fallen by a steep 7 percent last year in what was usually reminiscent of recession.
Lowe said the supply of credit had clearly been curtailed in the commercial property sector, but elsewhere it looked like firms were choosing to raise equity or use cash reserves to pay down debt.
'Over time, as the economy strengthens and investment picks up, a reversal of these trends would be expected,' he said.
Lowe said inflation had moderated last year thanks to slower wage growth, a higher currency and an increase in spare capacity in the economy.
'These factors all take time to fully work their way through, so we expect a further period of modest quarterly outcomes and thus further moderation in the year-ended inflation rate,' he said.
The RBA expects consumer price inflation to be around 2.5 percent in 2010 and a little higher in 2011.
(Reporting by Wayne Cole; Editing by Jeremy Laurence) (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) Keywords: AUSTRALIA ECONOMY/CENBANK (wayne.cole@reuters.com ; +61 2 9373 1813; Reuters Messaging: wayne.cole.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
Reserve Bank of Australia (RBA) Assistant Governor Philip Lowe also played down fears that China's tightening of credit would threaten its recovery and foresaw strong growth in Asia making up for weakness in the developed world.
Speaking at an economics conference, Lowe said the central bank expected Australia to grow by 3.25 to 3.5 percent this year and next, up from an estimated 2.0 percent in 2009.
'This is slightly above the average of the past two decades and, if it occurred, would likely see a gradual reduction in the spare capacity that currently exists,' said Lowe, who heads the central bank's economics department.
Lowe did not touch on monetary policy except to say the bank's forecasts were based on the assumption that the official cash rate had been a long way below normal and would return to more normal levels over time.
The RBA slashed its cash rate to a record low of 3.0 percent at the height of the global credit crunch before lifting it to 3.75 percent in the last three months of 2009.
It had been expected to hike again this month but surprised by holding rates steady, saying it wanted more time to assess the impact of its previous tightening.
Lowe said the bank's upbeat outlook was based on a judgment that growth in private demand will gradually strengthen, with public demand providing support in the short term.
Lowe singled out the labour market as a star performer with unemployment having peaked at 5.75 percent, far lower than first feared. He cited greater flexibility in the labour market as one reason for this, with employers and workers agreeing to cut hours or pay as a way of preserving jobs during the downturn.
He played down fears that China's steps to tighten lending would lead to a significant slowdown in the economy there, something that has been weighing on the Australian dollar.
'On balance, it is plausible to argue that the recent tightening in credit conditions is a favourable development in that it increases the likelihood that the Chinese economy is on a sustainable path,' said Lowe.
Indeed, he expected Asia in general to keep growing strongly but subdued activity in Europe and the United States.
That is crucial for Australia since Asia takes 70 percent of its exports. China is now its biggest trading partner, with an insatiable demand for commodities that has helped push up the prices of iron ore and coal, Australia's two biggest exports.
This was a major reason Lowe expected a strong increase in Australia's terms of trade -- what it gets for exports compared to what it pays for imports -- this year.
That in turn was fuelling a boom in investment in Australia's resource sector where many billions of dollars were being spent on mines and liquefied natural gas projects.
All of which helped counter concerns that the rollback of fiscal stimulus, such as grants for first-time home buyers, would lead to a fall off in economic activity, said Lowe.
'Looking forward, there remains some possibility that, with these measures now having been wound back, activity could again slow,' said Lowe. 'However, as time has passed, the likelihood of this being the case has declined.'
He cited evidence that spending on services, such as eating out, had been particularly strong in recent months, which as unlikely to be the result of fiscal measures.
Still, Lowe did note that the global credit crisis had made consumers and businesses more conservative in their spending plans despite being generally confident about the future.
'As we go forward, one of the things that will shape how the economy evolves is how these attitudes change,' he said.
The financial crisis had also impacted the demand and supply of business credit, which had fallen by a steep 7 percent last year in what was usually reminiscent of recession.
Lowe said the supply of credit had clearly been curtailed in the commercial property sector, but elsewhere it looked like firms were choosing to raise equity or use cash reserves to pay down debt.
'Over time, as the economy strengthens and investment picks up, a reversal of these trends would be expected,' he said.
Lowe said inflation had moderated last year thanks to slower wage growth, a higher currency and an increase in spare capacity in the economy.
'These factors all take time to fully work their way through, so we expect a further period of modest quarterly outcomes and thus further moderation in the year-ended inflation rate,' he said.
The RBA expects consumer price inflation to be around 2.5 percent in 2010 and a little higher in 2011.
(Reporting by Wayne Cole; Editing by Jeremy Laurence) (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) Keywords: AUSTRALIA ECONOMY/CENBANK (wayne.cole@reuters.com ; +61 2 9373 1813; Reuters Messaging: wayne.cole.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.