Still On “Narrow Path” To Soft Landing, Risks From China

In her appearance before the Senate Committee Governor Bullock said that the RBA is not expecting a recession and believes that we are still on a “narrow path” to a soft landing. She doesn’t expect job losses either but the unemployment rate will rise due to increased labour supply. She didn’t indicate any changes to the growth view.

• The labour market is easing but Bullock warned not to fixate on the unemployment rate. The RBA also looks at underemployment, churn and the vacancy rate, which she notes remains high as there is a structural mismatch. Youth unemployment and hours worked, which are down 3.5% 3m-annualised, are early indicators of a turn in the labour market.
• Lack of productivity growth remains an issue but Bullock is optimistic as the effect from new technology is in the pipeline and just takes time. In terms of inflation, the focus is on the impact productivity has on unit labour costs.
• Bullock elaborated on the previously noted risk to growth from China but said that Australia’s exports there have held up well. She believes that China’s 5% growth target will be achieved but the risk comes from the property sector. The government is likely to protect consumers but not bail out failed property companies. The recently announced fiscal stimulus is likely to go into infrastructure which should support global commodity prices and Australian exports but reduced property construction will have the opposite effect.
• The RBA still sees the impact of fiscal policy as neutral. It has taken into account higher state deficits but noted that a lot of this is going into infrastructure which is needed.