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Australia central bank upbeat on economy, but trade war a 'material risk'

Reuters logo Reuters 9/11/2018

FILE PHOTO: File photo of a worker walking past the Reserve Bank of Australia (RBA) building in central Sydney © Reuters/Daniel Munoz FILE PHOTO: File photo of a worker walking past the Reserve Bank of Australia (RBA) building in central Sydney  Australia's central bank raised its economic growth and inflation forecasts, but said on Friday that it did not see a strong case to raise interest rates in the near term.

The Reserve Bank of Australia (RBA) expects the A$1.8 trillion economy to extend its stellar run of 27 years of recession-free growth on the back of robust exports, solid public spending and rising non-mining investment.

"The Australian economy is performing well and a little stronger than earlier expected," Governor Philip Lowe said in the central bank’s quarterly statement on monetary policy, adding growth and inflation forecasts had been upgraded slightly.

“GDP growth is now expected to be around 3.5 percent on average over 2018 and 2019, but to ease in the latter part of the forecast period.”

The RBA lowered its forecasts for unemployment to 4.75 percent by June 2020 from 5.25 percent in its August statement. The change follows a bumper run in the labour market that sent the jobless rate to a 6-1/2-year low of 5 percent in September.

It forecast underlying inflation would return to its 2-3 percent target band next year, but will remain in the lower half of that range through the forecast period ending December 2020.

Inflation has consistently undershot the RBA's target since early 2015 and was the single biggest reason the central bank cut interest rates to a record low 1.50 in August 2016. The RBA has since kept rates unchanged.

The RBA has been upbeat about domestic output growth for several months now, as economic indicators have consistently outperformed its expectations.

Also boosting the RBA's confidence, corporate profits are high while measures of business sentiment are strong. All that has led to a surge in employment with annual jobs growth of 2.3 percent, much faster than the 1.6 percent rise in population.

Still, Lowe repeated the RBA's board does not see a "strong case" for a near-term hike as the progress in reducing unemployment and lifting inflation is likely to be gradual, but said its outlook meant a rate rise was likely at some point.

TRADE WAR

Lowe warned the possibility of trade protectionism escalating further was a "significant downside risk" to global growth, especially if tensions spread to involve other economies or if business investment decisions were affected.

U.S. President Donald Trump has slapped import tariffs on many Chinese goods and has threatened further duties, prompting China to retaliate. The leaders of the two countries are expected to meet at the end of this month to discuss trade and come to a possible resolution.

However, a further depreciation in the Australian dollar as a result of the trade war would be positive for the outlook for domestic growth and inflation, the RBA noted.

There are other risks to the RBA's forecasts.

The Bank noted there was uncertainty about how quickly the unemployment rate will decline and how fast that might feed into wage pressures and inflation.

Another source of uncertainty is the outlook for household consumption, which has held up so far despite weak income growth and high indebtedness. Falling housing prices in the major markets of Sydney and Melbourne could also affect consumption.

"As has been the case for some time, uncertainty about wages growth also translates into uncertainty about the outlook for household disposable income, which has a direct bearing on consumption growth."

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