MNI BRIEF: Services, Productivity, China Biggest Risks - Lowe

The Reserve Bank of Australia’s fight against inflation has shifted into the "next phase” which will feature slow unit labour cost growth, while sticky services inflation and the China slowdown represent the biggest risks to the economy, according to Governor Philp Lowe.

Speaking at the House of Representatives Standing Committee on Economics Friday, Lowe noted unit labour costs had increased rapidly, but for inflation to return to the 2-3% target, that growth will need to moderate. He added productivity had not not grown in three years, which represented the number one medium-term issue facing the Australian economy.

Services price inflation globally was also a challenge which could lead central banks to hike rates further, Lowe continued. He added China’s slowdown could also negatively impact the Australian economy. “The property industry is still in decline, and local government finances are under strain," he said. "So there’s a significant concern at the moment about the health of the Chinese economy.”

He noted, however, the Australia's economy remained on the RBA’s “soft-landing” path, which aims to pull inflation back to target by 2025.

The Reserve Board held rates steady at 4.1% on Aug 1, despite 20-year strong services inflation. (See MNI RBA WATCH: RBA Pauses With Tightening Bias)