speech an economic update philip lowe [ * ] governor address to the armidale business chamber armidale – 24 september 2019 i would like to thank the armidale business chamber for the invitation to speak this evening. i grew up in regional new south wales – in cootamundra and wagga wagga – so it is a treat for me to have been invited to speak in another great regional city. thank you. tonight, i would like to provide you with an economic update. i will focus first on the global situation and then talk about the australian economy. and finally, i will make some remarks about monetary policy. the main message on the global economy is that while it is still growing reasonably well, the risks are increasingly tilted to the downside. the main source of these downside risks are geopolitical developments in many parts of the world. these developments are creating considerable uncertainty and this uncertainty is causing businesses to reconsider their spending plans. this is making the international environment more challenging for us. on the australian economy, there are two main messages. the first is that after having been through a soft patch, a gentle turning point has been reached. while we are not expecting a return to strong economic growth in the near term, we are expecting growth to pick up. against this backdrop, the main source of domestic uncertainty continues to be the strength of household spending. the second message is a longer - term one. and that is the fundamental factors underpinning the longer - term outlook for the australian economy remain strong. one of the ongoing challenges we face as a country is to capitalise on those strong fundamentals. the global economy this first graph shows global economic growth and the international monetary fund's ( imf ) forecasts for the next few years ( graph 1 ). looking at this graph, one might ask why the concern : global growth has been stable and reasonable over recent times and the imf is forecasting this to continue over the next couple of years. if this forecast were to come to pass, that would make for 12 years of solid growth. graph 1 looking at labour markets, one might also ask why the concern. unemployment rates in most advanced economies are the lowest they have been in many decades, and businesses are finding it more difficult to fill jobs ( graph 2 ). these tighter labour markets are finally translating into stronger wages growth, with wages now increasing at close to the rates seen before the financial crisis in some countries. with inflation remaining

further assumed that a mechanical relationship between credit and gdp exists, which in turn results in big adverse impacts on gdp. to a fair extent these differences come down to a discussion about what economists would call elasticities : for the non - bank private sector to respond to a desire for banks to be funded differently, how big a change in the price is required – a little, or a lot? some of the industry estimates appear ( to me anyway ) to assume elasticity pessimism. official sector estimates are likely to be based on less pessimism. in truth, it is impossible to know for sure exactly how big these effects will be. that is a reason to proceed carefully, and to allow time for the new rules to be phased in. clearly, we wish the new rules to be constraining risk taking and leverage as the next boom approaches its peak, but that will probably be some years away, so we have time to implement strong standards and allow an appropriate period of transition. that said, there are three broad observations that i would like to offer. first, i think we ought to be wary of the assumption of a mechanical relationship between credit and gdp. of course a sudden serious impairment in lenders ’ ability to extend credit almost certainly amounts to a negative shock for growth in the short term. but did the steady rise in leverage over many years actually help growth by all that much? some would argue that its biggest effects were to help asset values rise, and to increase risk in the banking system, without doing all that much for growth and certainly not much for the sustainability of growth in major countries. some gradual decline in the ratio of credit to gdp over a number of years, relative to some ( unobservable ) baseline, without large scale losses in output may be difficult to achieve but i don ’ t think we should assume it is impossible. secondly, even accepting that there will probably be some effect of the reforms in lowering growth over some period of time, relative to baseline, we have to remember that there is a potential benefit on offer too : a global financial system that is more stable and therefore less likely to be a source of adverse shocks to the global economy in the future. so we have a cost - benefit calculation to make. quantifying all this is very difficult, but then that is often the case when deciding policies. thirdly, however, the reforms do need to be carefully calibrated with an eye to potential unintended consequences. one