The Reserve Bank has fuelled hope of further rate cuts saying inflation should stay low and that the non-mining economy will need to create more jobs in order to contain unemployment.
Deputy governor Philip Lowe told a Davos Connection forum in Melbourne employment in the non-mining-related part of the economy would need to grow 0.75 to 1 per cent per year to keep the unemployment rate from climbing.
He said the mining-related economy was far bigger than commonly realised. Reserve Bank research showed it accounted for for 16 to 17 per cent of GDP rather than the widely accepted 10 per cent.
“Our analysis shows mining investment draws significantly on construction activity, which in turn generates activity in industries such as business services, manufacturing, transport and wholesale trade,’ he said.
“Defined this way, mining-related employment accounts for around 8 per cent of total employment, although only around 2.75 per cent of the workforce is employed directly.”
“It would not be surprising if over the next few years growth in mining-related employment, broadly defined, was as high as one-half of the total growth in the Australian workforce.”
In order to keep pace, non-mining employment would need to climb far faster than it had been, by up to 1 per cent per annum, rather than flatlining as the official figures suggest it had throughout 2011...
Inflation was far less of a concern than the Bank had expected. More of Australia’s domestic demand was being met offshore than had been predicted putting “less pressure on domestic capacity than earlier expected”.
Abstracting from the effects of the carbon price, inflation was set to stay near the bottom of the Bank’s 2 to 3 per cent target band for the next one to two years.
Answering questions Dr Lowe said the Australian dollar was likely to stay high for “a number of years to come”.
"If that is the case, large parts of our economy have to undergo adjustment. The key to making manufacturing, higher education, parts of tourism competitive is in human capital accumulation," he said.
Futures traders nudged up the likelihood of an imminent rate cut within minutes of his speech.
ANZ economist Justin Fabo said Dr Lowe’s figuring suggested the Bank believed employment could safely grow by 15,000 per month (180,000 per year) rather than zero as the ABS figures showed it had during 2011.
This would be consistent three more rate cuts of 0.25 per cent in coming months.
Housing finance figures released yesterday showed borrowers more cautious - 15 per cent of mortgages taken out in March were fixed, the highest proportion in four years.
Loans to owner-occupiers climbed 0.3 per cent in March after falling 2.5 per cent in February and 1.5 per cent in January. The value of the loans fell a further 0.3 per cent.
In today's Sydney Morning Herald and Age
. May statement. The RBA thinks the economy is weak.
. CPI weak. Why the Bank will cut, then cut again
. Alright for some. The two Australias drift apart