glenn stevens : summary of economic developments during 2015 and outlook for australia opening statement by mr glenn stevens, governor of the reserve bank of australia, to the house of representatives standing committee on economics, sydney, 12 february 2016. * * * chair members of the committee since the committee ’ s previous meeting in september, we have continued to see evidence that economic activity outside the resources sector has been gradually improving. the pattern observed six months ago whereby business surveys were suggesting improving conditions by and large continued through to the end of the year. inevitably, this expansion is not uniform across the country or across industries. areas that led the growth dynamic a few years ago are on the trailing edge now. conversely, some that were subdued for a few years are among those leading growth today. but few, if any, expansions are completely even, either geographically or by industry. given the nature of the economic events through which we have been living, moreover, it is not surprising that there are differences. the good thing is that there are strong areas to counteract the weak ones. the available information suggests that real gdp is expanding at pace a bit lower than what we used to think of as normal. our estimate is that growth over the four quarters of 2015 was about 2½ per cent. this continued expansion has occurred in the face of a very large contraction in capital spending in the mining sector, restrained public final spending and the reduction in national income coming from the declining terms of trade. it has been helped by easy monetary policy and the lower exchange rate. notwithstanding below - average gdp growth, the demand for labour increased at an above average pace in 2015. the number of people employed, as measured, increased by well over 2 per cent, participation in the labour force picked up and the rate of unemployment declined, to be below 6 per cent. that is a noticeably better outcome than we expected a year ago. this poses the obvious question of how, with apparently still somewhat below - trend gdp growth, the rate of unemployment has fallen. and whether the pattern will continue. of course, it may be that the labour force data overstate the strength. alternatively they may be telling us something not yet apparent in the gdp estimates. more data may shed light on this question over time. part of the reconciliation appears to be that growth has been concentrated somewhat in labour - intensive areas, like certain household and business services. another part of the reconciliation probably lies in the very modest pace of growth of labour costs. at any given rate

to mid year. the clearest indication of this was that bond markets pushed down yields to levels not seen in decades. there were some special factors in operation but, even allowing for those, the tone of bond markets in may and june can only be described as particularly pessimistic. there also seemed to be some uncertainty, even if only briefly, about the us administration ’ s intentions for the us dollar. given the rapid rise against the us dollar of the australian dollar during that period, this caught our attention. there was a period, in other words, when it was not that hard to imagine a rather nasty international outcome - one where the fear of deflation in the us and elsewhere, regardless of how well based it was, could affect behaviour, and where the us dollar could be moving rapidly downwards, exporting any deflation pressure to other countries, including australia. while the probability of this scenario was still not that high, it seemed to be increasing, to the point where it caused us some discomfort. readers of the governor ’ s 6 june remarks to the house economics committee could see quite clearly the degree of concern at that time. we can all feel some genuine relief that things have looked better since. after a weak early part of the year, the us economy is doing much better in the second half. sars had a big, but temporary, impact in east asia, but relatively little impact elsewhere. east asia is now recovering quickly from that. china continues to grow rapidly. the us economy, while experiencing very low inflation, has not slipped into deflation, and some countries which have experienced deflation seem to be experiencing a bit less of it now ( e. g. china ). japan has, i think it is fair to say, surprised most people with solid growth over recent quarters. the euro area remains the weakest of the major regions, although there are tentative signs of improving conditions there in some of the most recent survey data. for the first time in a while, consensus forecasts for world growth are edging higher, not lower. financial market pricing also clearly has retreated from the pessimism in may and june : the exceptionally low bond rates have risen to being simply quite low. share markets had already turned somewhat more optimistic earlier, and have remained so. while we could argue about the extent to which future profits growth in the us is required to validate current pricing, what seems in little doubt is that actual profits in the us have recovered quite strongly