5 / 21 / 2019 the economic outlook and monetary policy | speeches | rba speech the economic outlook and monetary policy philip lowe [ * ] governor address to the economic society of australia brisbane – 21 may 2019 thank you for the invitation to speak to the economic society of australia. it is very good to be back here in brisbane today. i would like to begin by providing an update on recent developments in the global and australian economies. i will then discuss how our thinking on the appropriate stance of monetary policy has evolved over recent times. the global picture up until around the middle of last year, the global economy was growing quite briskly ( graph 1 ). then, over the second half of the year, growth slowed and this lower pace continued into 2019. https : / / www. rba. gov. au / speeches / 2019 / sp - gov - 2019 - 05 - 21. html 1 / 16 5 / 21 / 2019 the economic outlook and monetary policy | speeches | rba graph 1 there are a few factors that help explain this slowing in the global economy. the first is a slowdown in the chinese economy. the chinese authorities have for some time been seeking to address the build - up of risks in the financial system. as part of their efforts on this front they have sought to rein in shadow banking. the effect of this has been felt across their economy and, given the size of the chinese economy, the impact has also been felt around the world. a second factor is a marked slowdown in international trade. over the past year, global trade has not grown at all ( graph 2 ). this is unusual as, historically, global trade has tended to increase at least as fast as gdp. this recent weakness partly reflects the slowing in the chinese economy, but the increases in us and chinese tariffs are also a factor. not surprisingly, it has flowed through into weaker conditions in the manufacturing sector around the world and there has been a disruption to some supply chains. business investment, too, has been affected, with firms delaying investment decisions. in the face of increased uncertainty about future trade policy, many businesses have preferred to wait for a clearer picture. a cyclical downturn in the global electronics industry has also weighed on exports and investment, particularly in some east asian economies. https : / / www. rba. gov. au / speeches / 2019 / sp - gov - 2019 - 05 - 21. html 2 / 16 5 / 21 / 2019 the economic outlook and monetary

inflation either does not depart too far from target, or returns to target in cases where it has already moved. that is how an inflation target works, and it would do so even if the reserve bank's legislated mandate was expressed solely in terms of price stability. but the mandate in our act also encompasses full employment and the welfare of the australian people. these things are not in conflict with an inflation target. rather, they inform how that inflation - targeting regime operates day - to - day. they are relevant to the choices made about how quickly to return to target. the role of an inflation - targeting regime for monetary policy in supporting growth can be well illustrated by events in the australian economy over the past decade or so. during the build phase of the mining investment boom, there was a great call on australia's production capacity to get all the new mines built. this meant that, unlike many other countries, australia reached a point of having little spare capacity quite soon after the global financial crisis peaked. so there was a period where it was appropriate to set the cash rate a bit higher than the levels reached in the immediate aftermath of the crisis. since the peak of the mining boom, though, it has been appropriate to cushion the drag on growth as the terms of trade and mining investment declined. that is one of the reasons why monetary policy has been set to support growth in recent years. we expect mining investment to bottom out in coming quarters, as the last of the large lng expansion projects completes. after that, it will probably increase a little, as resource firms invest to maintain their production capacity at current levels. the scale of that ‘ sustaining investment ’ is nothing like that of the boom of the past decade or so. but the important point is that mining investment will no longer be dragging on growth. while there is spare capacity remaining, it is important for policy to support above - trend growth and work that spare capacity down. this raises the question of what trend might be and how we would know. just waiting until you see wages growth or inflation pick up would leave policymakers in the dark about how quickly they are moving towards their goals, or even if they are doing so at all. instead people use a range of different rules of thumb to assess how growth is tracking relative to trend, or ‘ potential growth ’. some of these are trickier to use in practice than others. for example, some estimates hinge on an estimate of feasible productivity growth. but these will