Philip Lowe: what is the new normal for economic policy?

Policy makers and government economists are being confronted with a once-in-a-generation low interest rate phenomena, which could mean Australia is in for a repeat of the tepid growth that plagued the Japanese economy of the last 20 years. RBA deputy governor Philip Lowe reflects on what it means as Australia struggles with the double challenge of low yields and the transition out of the mining boom.

There are two transitions that need to be managed right now: the transition faced by the Australian economy, following a period of significant growth in resources sector investment and strong commodity prices, and the global economy’s transition to a world of lower interest rates than we have become used to.

In the middle of the previous decade, global commodity prices rose sharply, largely on the back of strong growth in China. In response, investment in the resources sector in Australia picked up considerably to take advantage of these high prices and Australia’s endowment of natural resources, especially iron ore, coal and natural gas. These developments, which were interrupted briefly by the financial crisis of 2008 and 2009, can be seen clearly in this first graph. By 2012, mining investment, as a share of GDP, peaked at its highest level in at least a century.


The good news is that all this investment has considerably expanded Australia’s capital stock, and thus our productive capacity. This is now flowing through into higher resource production and exports, and it will continue to do so for many years to come. In 2014, the tonnage of iron ore exported was double that of five years earlier, while the tonnage of coal exported was up 40% over this same period. There has also been growth in LNG exports, although the really big increases still lie ahead of us. All up, growth in resource exports has contributed around 1 percentage point to annual GDP growth over recent years, and this is expected to continue into the foreseeable future, particularly as more LNG projects come on line.

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