The OECD Economic Outlook 2014 Issue 2 has been released in a preliminary version. There are some important warnings which the RBA should heed. Essentially, OECD is highlighting again the risks in the current RBA policy of using low interest rates to drive housing growth in lieu of mining investment. They appear to believe rates should be taken higher and additional prudential measures should be taken.
Output growth is projected to dip to 2.5% in 2015 but recover to 3% in 2016. Declining business investment will be countered by gathering momentum in consumption and exports. Growth at the projected pace will be enough to lower the unemployment rate, although consumer price inflation will remain moderate due to economic slack.
Fiscal policy should continue to aim for a budget surplus by the early 2020s but given economic uncertainties, it should avoid heavy front loading. Short of negative surprises, withdrawal of monetary stimulus should start in the second quarter of 2015. The booming housing market and mortgage lending will require close attention by the authorities. There is room for both fiscal and monetary policy to provide support in the event of unexpected negative economic shocks.
The Australian economy is going through a period of adjustment as activity has to shift from the previously booming resource sector. Cooling commodity prices and declining resource-sector investment have resulted in job and output losses, but a lower exchange rate is lifting employment and exports elsewhere in the economy. House price increases are encouraging construction and consumption, but are also a concern in that a sharp reversal could cut aggregate domestic demand.
The Reserve Bank of Australia’s (RBA’s) policy rate has remained at 2.5% since August 2013, well below historical norms. Though helping economic adjustment, this monetary support has intensified search for returns by investors. This requires close oversight of asset-market developments, particularly rising housing credit, which is now being driven by investors. Further prudential measures on mortgage lending should be considered as a targetted means to cool the market, thereby heading off risks to financial stability.
External risks remain prominent, with recent steep falls in some commodity prices exemplifying the potential for rapit change in resource revenues. Domestically, the momentum in property prices is uncertain and could unwind sharply. When and how quickly non-0mining investment picks up is uncertain, as is the degree to which households will dip further into savings to sustain their consumption.
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