The Reserve Bank of Australia (RBA) is finally seeing greater evidence of strength from some of the country's non-mining sectors, which could bode well for economic growth now that investment in the resource space is on the decline.
On Wednesday, March 26, RBA Governor Glenn Stevens delivered an upbeat speech in Hong Kong before the 17th Annual Credit Suisse Asian Investment Conference.
Following his remarks, the Australian dollar extend its recent rally and currently trades near USD$0.923, up about 6.3 percent from its three-year low in late January, near USD0.868. At this level, the aussie is down about 16.2 percent from this cycle's high in mid-2011.
For 2014, Mr. Stevens predicts growth will be led by the developed world, a rebalancing of sorts after the many years in which the emerging markets drove the global economy.
As for Australia's regional peers, the RBA chief sees growth continuing at a pace in line with the recent trend. He noted that China, which grew slightly faster than the central government's official target last year, could slow down somewhat during the first half of this year.
Recent indicators, including slowing industrial production, moderation in retail sales and passenger vehicle sales, and lower investment in fixed assets, all suggest a near-term slackening. China is Australia's single largest trading partner, and its demand for the country's resources, particularly iron ore, have helped drive export growth in recent months.
On the more positive side, Mr. Stevens believes Chinese policymakers' efforts to rein in the country's shadow-banking system should prove successful and, therefore, remove a key source of risk to its economy. Additionally, he also noted that the Middle Kingdom continues to make strides toward greater liberalization of its economy, including a widening of the range in which the renminbi is allowed to trade.
Turning tow! ard the home front, Mr. Stevens observed that a number of domestic analysts and pundits tend to take a pessimistic view of the country's growth prospects, a sharp contrast to the more optimistic tone he hears from their peers in Asia.
His own take is more measured: The Australian economy is doing a bit better than many in the country believe, but not nearly as well as foreign investors might assume.
Australia emerged from the Global Financial Crisis in far better shape than most of its developed-world peers. And the resource boom, which Mr. Stevens characterized as being of "truly epic proportions," was a significant boost to the economy, with gross domestic product (GDP) now 13 percent higher than it was at the beginning of 2009.
However, over the past 18 months, Australia's economy has been growing at a pace below the country's long-term trend of 3 percent annualized.
While Mr. Stevens says Australia's resource exports should continue to grow, helped along by new projects finally coming on line as well as a lower exchange rate, that alone won't be enough to get the economy back on track.
To that end, the country's consumers will have to eschew their recent conservatism and start opening their wallets, while businesses will have to invest in future growth. Though business confidence has improved in recent months, companies tend to be cautious in committing to higher capital spending until they see greater evidence that the economy's on the rebound.
As we've noted recently, the retail space could be one source of non-mining sector strength, though the RBA believes consumer spending will grow only slightly faster than incomes, at best.
And the housing sector has been a major beneficiary of historically low interest rates. Although a number of analysts and economists have been concerned that the country could be in the midst of a real estate bubble, as it didn't experience a housing crash anywhere near what the US suffered, Mr. Stevens said t! hat the r! ise in dwelling construction is a welcome development. At the same time, the central bank is closely monitoring the sector for any signs of speculative excess.
Overall, the RBA thinks the early evidence suggests that the so-called handover from mining-led demand growth to broader private demand growth is finally underway. The central bank predicts economic growth could strengthen later this year and accelerate further during 2015.
Last year, the country's economy grew 2.4 percent year over year. For full-year 2014, the consensus among private-sector economists is that GDP will grow 2.8 percent, with a fairly consistent pace of growth in each of the four quarters.