speech the year ahead philip lowe [ * ] governor address to the national press club sydney – 5 february 2020 thank you for inviting me back to address the national press club. it is an honour to be here again. at this lunch a year ago, i spoke about the year ahead. i would like to do the same again today. twelve months ago, i reminded you that we do not have a crystal ball that can be used to see the future with certainty. since then, some things have turned out as expected, but there have been plenty of surprises as well. no doubt, the same will be true this year. today, though, i would like to talk about the reserve bank's central scenario for the global and australian economies and some of the factors that we will be watching over the year ahead. i would also like to touch on monetary policy. the global economy the central scenario for the global economy over the next couple of years remains reasonable and growth is expected to be a little stronger than it was in 2019. the imf estimates that the global economy expanded by 2. 9 per cent last year and in its latest published forecasts is predicting economic growth to lift to 3. 3 per cent this year and 3. 4 per cent in 2021 ( graph 1 ). graph 1 looking back, though, global growth in 2019 was not as strong as we had expected. this was largely because the trade and technology disputes between the united states and china and the brexit debate had a sobering effect on investment around the world. the trade disputes also led to some reconfiguration of global supply chains and resulted in very soft conditions in the manufacturing sector and a contraction in international trade. some of these dark clouds that were hanging over the global economy last year have lightened a little recently. with the progress on the trade and brexit issues, there have been some signs that the downswing in manufacturing activity and international trade is coming to an end ( graph 2 ). the down cycle in the global semiconductor industry also looks to be running its course. graph 2 these are encouraging developments and provide a reasonable basis to expect that this year will be better than last year. having said that, it remains possible that the expected pick - up in growth is derailed by a re - escalation of the trade and technology disputes. another, more recent source of uncertainty is the outbreak of the coronavirus, which i will discuss shortly. one other unexpected development over the past year

estimated to be largely balanced ( chart 4 ). we often hear anecdotes of capacity constraint, especially those related to labor shortages, partly because the current economic recovery is driven primarily by the non - manufacturing sector, which is inherently more labor intensive and thus absorbs more workforce than otherwise. under these circumstances, raising potential growth is of vital importance. what we envisage by achieving price stability is the sound development of the national economy. 6 in other words, stable inflation should be attained with robust growth, accompanied by healthy job creation and reasonable wage hikes. low potential growth does not bode well for this scenario, even if, ceteris paribus, it contributes to raising inflation through the capacity constraint. kohn, d. l. ( 2009 ) : ‘ ‘ interactions between monetary and fiscal policy in the current situation, ’ ’ speech at the conference on monetary - fiscal policy interactions, expectations, and dynamics in the current economic crisis, princeton university, may 23, 2009. the bank of japan act states ‘ ‘ currency and monetary control by the bank of japan shall be aimed at achieving price stability, thereby contributing to the sound development of the national economy. ’ ’ ( article 2 ) bis central bankers ’ speeches this argues more imminently in favor of supply - side policies such as the third arrow of abenomics. ambitious labor market reforms, decisive deregulation and strong governance reforms are all supposed to raise potential growth effectively through increasing both labor and capital inputs, as well as by improving total factor productivity. they are indeed what the japanese government intends to deliver, and i think it has made steady progress in this respect, including its revised growth strategy that will be announced by the end of this month. in the meantime, the success of our monetary policy in achieving the 2 percent price stability target would help the transition from deflationary equilibrium, where disinvesting and saving used to be considered virtues, to inflation equilibrium, where the revival of animal spirits generates fixed business investment that in turn contributes to elevating potential growth. concluding remarks perhaps we are getting a bit too far ahead of ourselves here. for us, the immediate challenge still remains how to deliver stable 2 percent inflation, and discussion of the situation after that may be premature at this stage. after all, there is no point counting our chickens before they are hatched. that is why i put ‘ ‘ interim report ’ ’ in the title of my presentation today, hoping that i can report to you