RBA appears cautiously optimistic

Reserve Bank Governor Glenn Stevens confirmed this week that the Australian economy has weathered the economic crisis better than originally expected. Although Australia has experienced a downturn, our economy has fared better than most economies around the world. “The Australian economy and our financial system have been travelling rather better than those of most of our peers through the crisis and the initial economic aftermath,” Mr Stevens said during a speech this week.

Over the past six months, confidence in the Australian economy has recovered some ground, which is important an important factor in keeping our economy out of recession. A loss of confidence can work as a vicious cycle, as it can precipitate the onset of a recession which is exactly what people fear. “Late last year, survey after survey pointed to a major battening down of the hatches by businesses across the country. The risk was that these actions, in bringing on the very weakness that everyone feared, could set off a cycle of further weakening in demand and output,” said Mr Stevens.

Today, that situation is less likely to occur. “It is becoming more common for Australians to see the glass as half full than as half empty. Put another way, we can much more easily imagine upside risks to the outlook, to balance out the downside ones, than was the case six months ago,” he said.

However, Mr Stevens cautioned against too much optimism. “Just as it would have been a mistake nine months ago to write off our long term economic prospects at the height of the financial turmoil, it would be a mistake now to lapse into the comfortable assumption that easy prosperity will come our way,” he said.

There is a risk our housing shortage, coupled with the supply of cheap credit, will trigger a housing bubble. According to one industry association, Australian new home sales were flat in June from May, but up 13 per cent on a half yearly basis, while figures from the Australian Bureau of Statistics show there was a 1.3 per cent increase in total dwelling units approved in June 2009. The value of total building, however, rose 35.8 per cent on a seasonally adjusted basis. Mr Stevens highlighted it is crucial that the low cost of housing finance results in more dwellings, not just higher prices.

All in all, the evidence continues to support the status quo. As long as there are no major changes in economic conditions, it is likely the central bank will keep rates on hold over the coming months.

Infochoice.com.au