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Regional Variation in a National Economy

Tuesday, 17 April 2018

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In a rare opportunity for Perth, the Governor of the Reserve Bank of Australia, Mr Philip Lowe, addressed the AICC (WA) EY Annual Signature Lunch, sponsored by the School of Business and Law.

Mr Lowe provided an insightful and optimistic address, looking at both cyclical and structural changes across Australia. Looking at variances in both areas, the Governor noted convergence in datasets, and that consistent trends towards less dramatic fluctuations across regions could be measured.

“From the cyclical perspective, the good news is that conditions have improved across most of Australia over the past year. And from a structural perspective, over time the differences in the structure of output and employment across regions are tending to become smaller, rather than larger.”

Using the metrics of employment rates, business investment (non-mining), business confidence, and wage growth, the Governor further explored this theme, concluding that the overall picture for the national economy is one of improvement. The combination of all factors deliver a picture of gradual improvement, albeit that slow wage growth has been of greater proportional impact through regional fluctuations.  The WA resources boom and its aftermath have had a strong influence on wage fluctuation. For the first time in a number of years there is less volatility in this area, a position that Mr Lowe described as a “positive trend”.

From the structural perspective Mr Lowe clearly noted that “there is a longer-run trend towards more similarity, rather than more divergence, in the underlying economic structure across the country.” He discussed volatility in housing prices, migration trends, qualification levels in the workforce, and a longer-term shift from a manufacturing economy to a services economy as influencing factors. Although there have been regional differences, these continue to narrow over time.

“The Reserve Bank's responsibility is to set monetary policy for Australia as a whole. We seek to do that in a way that keeps the national economy on an even keel, and inflation low and stable. No matter where one lives in Australia, we all benefit from this stability and from being part of a national economy. This is so, even if, at times, in some areas, people might wish for a different level of interest rates from that appropriate for the national economy. In setting that national rate, I can assure you we pay close attention to what is happening right across the country.”

Expecting a gradual level of continued growth, Mr Lowe did not advocate the need for a near-term adjustment to monetary policy. The stability of the combination of all factors led him to remark that Australia’s economy is projected to deliver moderate wage and inflation growth into the future, although inflation had sometimes been frustratingly low. On the topic of economic recovery he remarked “although a positive story, we still need to do more”.

The full text of Mr Lowe’s speech and presentation graphs is available on the Reserve Bank of Australia's website.

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