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Home / Business / Economy

Mining power likely to boost confidence

Bloomberg
26 Jul, 2011 06:50 PM4 mins to read

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Glenn Stevens, Reserve Bank of Australia Governor, spoke on the shifting economy. Photo / Getty Images

Glenn Stevens, Reserve Bank of Australia Governor, spoke on the shifting economy. Photo / Getty Images

Reserve Bank of Australia Governor Glenn Stevens says the nation's subdued household spending will likely rebound "at some point" as consumers gain confidence in the sustainability of mining-led growth.

"As a better sense of the degree of persistence is gained, people will probably be more confident to spend than perhaps
they are just now," he said yesterday.

"It is entirely possible that, were some of the current raft of uncertainties to lessen, the mood could lift noticeably, so I don't think we need to be totally gloomy."

Australian households are saving more as assets including stocks and houses decline in value.

A 21 per cent rise in the local dollar in the past year, spurred by a surge in mining investment to meet demand from India and China, is hurting the manufacturing and tourism industries.

While Stevens didn't comment on the future of interest rates, he said "intense speculation about how they might change are said to have had an impact on confidence - even after a period of more than a year in which the cash rate has changed only once, the most stable outcome for five years".

Today's government report on the consumer price index will help determine the trajectory of interest rates, the RBA said last week. The currency was little changed after Stevens's comments. It earlier rose to within a cent of its highest level since exchange controls were scrapped in 1983.

Stevens said the rise in the nation's terms of trade, a measure of income from exports, had probably ended and any increase in consumption was likely to be "moderate". That raised the need for policy makers to boost worker productivity to ensure income gains.

"That sort of an environment would be one in which the cautious consumer might feel inclined towards well-based optimism, and re-open the purse strings," he said.

He said the shift to slower consumption growth was a "point of optimism" because it strengthened household finances. Income from the resources boom benefited the rest of the economy through several channels, including a "quite high" exchange rate that boosted purchasing power, Stevens said.

Australia is undergoing what economists call a structural change - a shift in productive capacity to the mining and construction industries while the stronger currency hurts exporters, education, tourism and manufacturing.

Prime Minister Julia Gillard's Government estimates mining investment will reach A$76 billion ($83 billion) this fiscal year.

"It is not unreasonable for a nation to save a good deal of a sudden rise in national income conferred via a jump in the terms of trade, until it becomes clearer how persistent that new level of income is," Stevens said.

"The saving rate, debt burdens and wealth will at some stage reach levels at which people are more comfortable. We could then reasonably expect to see consumption record more growth than it has in the past few years."

Consumer sentiment this month plunged by the most since Lehman Brothers Holdings collapsed in 2008, a survey from Westpac and Melbourne Institute showed. Business confidence dropped to a six-month low, according to a National Australia Bank survey of more than 400 companies in June.

Stevens has kept borrowing costs unchanged since his last increase in November as the economy recovered from the country's costliest floods and the labour market lost 5400 jobs in the April-June period, the weakest quarter since 2001. At 4.75 per cent, the nation's benchmark interest rate is the highest of the world's developed economies.

Westpac on July 15 became the first of Australia's four largest banks to predict that the RBA's next move will be a rate cut in December. The bank's prediction was an outlier in a Bloomberg News survey of 21 economists, in which the median estimate was for a quarter-point increase in November.

Westpac, with A$279 billion in home loans outstanding, said on July 15 "interest rates are too high in Australia given the state of the non-mining sectors of the domestic economy".

Also this month, David Jones, the second-biggest department store chain, cut its profit forecast on an unprecedented decline in demand, it said.

The stronger dollar has helped contain inflation while the unemployment rate declined to 4.9 per cent in June from 5.8 per cent two years earlier.

"Structural change is something people rarely find comfortable in the short term, even though a capacity to adapt is a characteristic displayed by the most successful economies," Stevens said.

- Bloomberg

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