My authorities are monitoring closely the deteriorating external environment, very conscious of the prospect for a sustained period of global weakness and the downside risks this poses for the Australian economy. Heightened global financial volatility and uncertainty are compounding domestic pressures associated with a two speed economy, weighing on confidence in non-mining sectors. A significant increase in household saving – in many ways a positive development – is also constraining retail activity. Non-mining related growth is forecast to be weak, and we have witnessed a small upturn in unemployment in August, to 5.3 percent.
My authorities remain committed to preserve, and optimize, the considerable policy room they have available to respond to external instability. Recent improvements in both household and banking sector balance sheets will also help to buttress the domestic economy. More generally, a combination of factors continues to underpin the Australian economy’s resilience: a continuing commitment to sound policy and regulatory frameworks; a proactive and cautious approach by the prudential regulator; the adaptability supported and fostered over many years by structural reform and exchange rate flexibility; as well as the advantages of close integration with a fast growing Asian region. After widespread damage and disruption associated with devastating floods and cyclones across wide areas of Australia earlier this year, GDP recovered strongly, by 1.2 percent, in the June quarter.
The benefits of proximity to emerging Asia are most obviously manifested in the unprecedented mining boom now driving growth. Australia’s terms of trade are currently at 140 year highs. Mining investment is expected to reach record highs as a share of GDP over the next two years, rivaling that for the rest of the economy, notwithstanding the fact that mining production accounts for only around 9 percent of GDP. These developments are posing significant adjustment challenges for the Australian economy. However, the mining boom is a manifestation of a broader, long-term phenomenon, namely the transformation of Asia, with profound implications for the pattern of global production and consumption. The policy challenge in Australia is to maintain the right policy settings – both macroeconomic and structural – to ensure the economy benefits fully from the opportunities this transformation will bring.