“One of the sharpest disinflations in decades has been achieved without a decline in GDP, and with the employment share at an all-time high. That is a great outcome - but it also means that the recovery in GDP growth began last year with the highest level of capacity utilisation in any recovery over the past 40 years,” he said.
Speaking at this week’s UBS Australasia Conference, Hauser likened the nation’s economic prospects to a Melbourne Cup race.
“That’s a real achievement, when it comes to making full use of the economy’s available resources.”
But Hauser noted that it also poses a big and pressing question.
“Could Australia find itself trapped on the economic rail like one of the riders in last week’s Cup – boxed in by its own capacity constraints? Or will it find ways to break free, through higher productivity and more investment in new capacity? If it does, we could be off to the races,” he said.
Drawing on the Reserve Bank’s latest data and a touch of Cup Day humour, Hauser painted a picture of cautious optimism.
“If we fail to [create more supply capacity], we may find ourselves boxed in on the rail. If we succeed, we could be off to the races.”
The absence of spare capacity is good news, according to the RBA, as it means busier companies and more jobs.
“Achieving sustainable full employment is a key part of the Monetary Policy Board’s mandate. But it does pose challenges for policy setting.”
Hauser said those challenges were highlighted by the latest data, which showed underlying inflation rising to three per cent in the year to September - half a percentage point higher than expected in the RBA’s August forecasts. At the same time, unemployment rose to 4.5 per cent in September.
Hauser outlined different scenarios for where things could head from here but emphasised that the opportunity lies in an economy already operating near full capacity.
“An economy already operating near full capacity. With extraordinary minerals resources, old and new. World-leading universities and human capital. A plumb geographical position in the Asia Pacific. A huge domestic savings pool - the second largest median wealth per capita in the world according to UBS, and the fourth largest pension system globally. One of the lowest public debt burdens in the G20. A strong banking system, proven political and economic institutions, and a long track record of welcoming foreign capital and labour,” he said.
“If that doesn’t scream ‘investment potential’, I don’t know what does. Seize that opportunity, and we really could be off to the races.”
Hauser said the RBA’s latest projections show inflation settling very slightly above the midpoint of the 2–3 per cent target range if the cash rate follows a market-derived path of one more 25 basis point cut.
“But monetary policy must be set not through the rearview mirror but in anticipation of where the economy is going in the future. For inflation, that depends on the balance of demand and supply – and here we find ourselves in an unusual place.”
