February’s monetary policy statement issued by the Reserve Bank of Australia (RBA) had a distinct positive tone associated with it, with expectations of return to stronger rates of economic growth aided by both international and domestic factors. The critical question is what does the latest monetary policy statement mean for the Australian economy, and specifically for the printing and associated industries? This column will attempt to provide such an assessment based on the latest published economic data.

RBA positive assessment

Globally business and consumer confidence have improved, and above trend economic growth is now being forecast for a number of advanced economies, although economic uncertainties have not completely vanished. Economic growth in China was stronger in the second half of 2016, driven by infrastructure and construction activity, however this composition of growth as noted by the RBA poses certain risks to Chinese and global economic growth going forward. The Australian economy has benefitted from recent higher commodity prices, with national income getting a welcome boost.

Headline inflation rates across most countries are trending up in line with improvements in commodity prices and overall economic activity. With interest rates increasing in the Unites States – as authorities there commence the process of returning rates to more normal settings, the RBA now believes that the monetary policy easing cycle across major economies has come to an end, as financial markets show signs they are functioning efficiently.

The RBA has dismissed the recent slowdown of economic activity in Australia as an aberration and remains confident that economic growth rates will return to more reasonable rates during the December 2016 quarter. The RBA growth outlook over the next two years is for rates of economic growth of around 3 per cent. Economic growth is expected to be driven by increases in resource exports, the impact of declining resources investment coming to an end, consumption growth increasing to moderate levels, and improvements in non-mining business investment.

RBA’s statement notes that both low interest rates and a weaker currency remain critical factors in supporting economic growth in Australia and are helping the economy in its transition following the end of the mining investment boom. Despite the more optimistic growth sentiments expressed by the RBA, both headline and underlying inflation while forecast to trend up are still expected to remain low and remain well within the RBA target range. Increased economic growth with low inflation is the economic scenario that the RBA now believes will materialise over the next couple of years.        

Economic outlook

Global economic growth is now expected to be above potential over the next couple of years due to accommodative monetary policy globally and expansionary fiscal policy in the United States.

The RBA’s initial assessment of the new US administration economic policies is that policies such as personal and corporate tax reductions will boost economic activity and increase inflation. Concern is being expressed that protectionist trade and restrictive immigration policies on the other hand could undermine global growth.

The RBA expects consumption growth in Australia to be relatively stronger over the forecast period and will aid economic growth. While the outlook for non-mining business investment looks weak, the RBA remains confident that it will pick up towards the end of the forecast period (June 2019) as capacity utilisation measures have increased and currently remain above their long term averages.

Employment growth is forecast to pick up in the first half of 2017 before stabilising resulting in slightly lower unemployment rate over the forecast period. Wage inflation is forecast to remain subdued only increasing from late 2017. Continued spare capacity in the labour market however is expected to limit the recovery in wages.  While uncertainties remain over the inflation outlook, the RBA is confident that headline and underlying inflation will both come in at around the 2-3 per cent range by the end of the forecast period.

Economic uncertainties

The RBA statement highlights the uncertainties impacting the latest forecasts such as the new US administration and its policies, the outlook for the Chinese economy remains uncertain with potential impacts on global economic growth and commodity prices. Domestic uncertainties include the state of the labour market and its likely impact and influence on wages, household income and consumption. The impact of domestic cost pressures on eventual inflation outcomes remains another source of uncertainty.

RBA forecasts

Outlined in the table are the latest RBA forecasts for growth and inflation covering the forecast period to June 2019. Economic growth is expected to pick up towards the end of 2017 and remain above trend over the forecast period. Compared to the Mid-Year Economic and Fiscal Outlook (MYEFO) released by the Federal Government in December 2016, the RBA forecasts on economic growth and inflation are higher reflecting confidence of increased economic activity over the outlook period.

 
What it means for printing businesses

The RBA’s latest Monetary Policy Statement portrays a more optimistic view of economic conditions going forward. The positive tone is based on both an assessment of prevailing economic conditions globally and domestically as well as factoring in some of the economic risks and uncertainties associated with the latest economic forecasts.

Stronger economic growth should in normal circumstances be a welcome development for printing businesses but critically the economic drivers and composition for future economic growth is not one that will directly boost printing industry activity. This is due to the ongoing weakness and doubts about household income growth which in turn influences consumption expenditure a pivotal driver of economic activity in the printing and associated industries.  More encouraging news for printing participants comes from the forecasts on wage and consumer inflation which indicates cost pressures will continue to remain moderate over the forecast period. For mature industries such as printing with low bargaining power in determining product and services prices, operating in a relatively low cost inflationary environment is likely to be beneficial.

The RBA forecasts are also assuming an unchanged Australian Dollar which if materialises will help provide a certain degree of certainty for imported material and technology used by operators in the printing industry. While economic theory would suggest that a lower Australian Dollar would help those printing operators engaged in export and import competing activities, given significant raw materials and technology is imported by the industry the net economic gain or benefit is not that evident.

The pivotal indicator

Key economic indicator and driver of economic activity going forward will be business investment but critically non-mining business investment. As the transition of the Australian economy progresses from one that was led by the mining investment boom towards a more diversified growth phase, non-mining business investment which has remained subdued in recent years needs to recover in order to provide the required economic impetus and help offset the decline in mining business investment. The chart titled business investment share of GDP is one of the pivotal indicators for the post resources boom era. Sustained improvements in this indicator going forward will help underpin Australia’s economic growth.    

Conclusion

There is no doubt that if the Australian economy commences to grow at a more rapid rate then eventually all sectors of the Australian economy, including printing, will start to reap the economic benefits associated with such growth. While recent economic growth has shown that the printing industry has demonstrated remarkable economic resilience by growing at a faster rate than the Australian economy in recent quarters, the growth has tended to come from a relatively lower historical base. Having an economy that is both strong and expanding with a sustainable growth composition featuring external and internal factors will ensure the economic growth dividend is shared by more and more sectors of the Australian economy – including mature, technology challenged, evolving and consolidating industries like printing.  

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