christopher kent : the business cycle in australia address by mr christopher kent, assistant governor ( economic ) of the reserve bank of australia, to the australian business economists ( abe ), sydney, 13 november 2014. * * * i thank natasha cassidy, vanessa crowe, emma doherty, craig evans and thomas mathews for help in preparing these remarks. introduction i ’ d like to thank the australian business economists for the invitation to speak here today. it ’ s not surprising that after a period of sub - par growth in many parts of the world, we often hear the term “ recovery ” in discussion of current economic conditions and future prospects. for economists, the term recovery fits within the realm of business cycle analysis. at one extreme, it implies that the economy is near a low point in the cycle with the prospect of much better conditions ahead. a less extreme case would be one where growth has been below its trend ( or potential ) pace for a time, leading to a rise in unemployment and spare productive capacity more generally. in both cases, a period of above - trend growth would be required to reduce the unemployment rate and make use of that spare capacity. in my discussion today, i want to consider the extent to which either of these descriptions might be warranted, both here and offshore. this requires an assessment of where the economy has been, where it is now and where we think it is likely to be in the future. the first two parts of this are not always straight forward, and as for the third, the bank regularly highlights the fact that forecasting is difficult and imprecise. 1 also, conditions can vary somewhat across different parts of the economy. this is especially true of the australian economy right now given the differences between the mining and non - mining sectors and some resulting variation in conditions across the states. state of the global economy let ’ s start with a consideration of the state of the global economic business cycle. in terms of australia ’ s real economy – by which i mean the production, trade and consumption of goods and services – what matters on the global front is the strength of our major trading partners. this can be measured by combining the growth of each of our trading partners using australia ’ s export shares as weights ( graph 1 ). according to this measure, activity rebounded in 2010, following the worst of the global financial crisis. since then, overall growth of australia ’ s major trading partners has actually been relatively stable at close to its long - term average. in large part

which leads some to dismiss it as ‘ bad growth ’. are people presuming that it's all driven by the public sector and therefore somehow artificial? or is it that they think jobs in service industries are all low - skill, low - wage jobs and therefore bad jobs? ( university academics, teachers and medical professionals would presumably disagree with that idea. ) or is it just discomfort that growth is concentrated in industries where productivity is harder to measure? or do people genuinely think that it's not really production if you can't drop it on your foot? the literature in fact shows that growth in health and education can indeed be ‘ good growth ’ – sustainable growth. both sectors contribute to stronger performance in other sectors. better health outcomes are good for their own sake ; they improve people's welfare. in addition, they improve productivity of individual workers and make it less likely that careers will be cut short ( and retirement income will fall short ) because of ill - health. similarly, better education is not only good for its own sake – it builds human capital, the better skills we all need to be more productive. to support growth and living standards in parts of the economy, it is important that the increased resourcing of and employment in the health and education sectors actually translate into better outcomes. this is an ongoing conversation in public policy, one i'm not qualified to add to. i will, however, note another connection to the kelly legacy. the commonwealth tariff board, on which stan served for many years, morphed first into the industries assistance commission, then the industry commission, and finally, the productivity commission. [ 4 ] over the past two decades of its existence in its current form, the commission has become the key public - sector institution involved in developing policies to boost productivity. i note the commission has recently published its fiveyear review, which contains many policy ideas for improving effectiveness and outcomes in the areas of health and education ( productivity commission 2017 ). where will the growth really come from? the preceding just shows that, over time, some industries grow faster than others. for a while, the mining industry was growing faster than the rest. other industries take the lead at other times. but it doesn't really get at the underlying drivers of growth. we need to ask : where will the growth really come from, over the longer term? in answering this question, it is hard to go past the ‘ three ps ’ popularised by our colleagues at treasury