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- RBA governor Philip Lowe laid out a positive outlook for the Australian economy in his speech at the AFR business summit.
- GDP grew 3.1% in December and the unemployment rate saw a higher-than-expected dip to 6.4%.
- Bond yields have shown volatility following expectations of higher inflation as well as global economic recovery.
In his speech in the AFR business summit on Wednesday, RBA Governor Philip Lowe shed light on the improving economic conditions for the Australian economy. Governor Lowe assured that the economic recovery had led to a lift in the sentiment in the economy. The expectations of increased fiscal stimulus in the United States have also contributed to the upliftment in prospects.
Some reassuring statistics include the GDP growth of 3.1% recorded in the December quarter and improving employment rate. These improvements keep Australia positioned for further recovery towards higher growth.
The factors that have enabled Australia to emerge out of the pandemic-induced slowdown reflect the strength of the economy. The vaccine roll-out has brought in strength on the health front in addition to the resilience and flexibility shown by Australians in adjusting to the changing times.
The V-shaped recovery shown by employment in Australia has been one of the strongest indicators of the economic improvement. The RBA prioritised job creation throughout all stages of the economic recovery, which led to a higher-than-expected increase in the employment rate.
The unemployment rate has dipped to 6.4%. Additionally, job vacancies and ads, and hiring intentions are still building up in the economy, pointing to further job market improvements. However, expectations remain mixed, as JobKeeper would come to an end later this month.
Amidst these improvements, however, wages and prices have not been able to grow as much. These are the areas where further policies could be targeted. The RBA maintains that the cash rate would not be increased until the inflation target of 2-3% is not achieved.
To reach an inflation rate of 2-3%, a minimum wage growth of 3% is required, much higher than the current wage growth rate of 1.4%. Inflation is running at 1.25% and is expected to remain below 2% over the next two years.
The Bond-Yield Surge
Globally, countries have started to recover and show strength. This positive outlook gave rise to higher inflation expectations followed by a treasury bond-yield hike in the US. Additionally, the generous fiscal stimulus package offered by the Biden government added to these positive expectations.
However, this follows a period wherein 10-year bond yields would be at an all-time low, which has been the case for Australia as well. This points to certain prolonged factors such as higher savings, steep GDP declines, and uncertainty about the future as well as inflation expectations.
In November, yield prices moved higher, underlying the rise in investors’ positive sentiments and increased inflation expectations. Also, the current market scenario shook up consumer expectations a bit, which had remained stagnated for a few months. This added to the positive attitude amongst people, which boosted the bond-yield hike.