Australia’s central bank has warned Europe’s financial turmoil could pose a risk to Asian growth – but says booming commodities prices are insulating its own economy.
Assistant governor of the Reserve Bank of Australia (RBA) Phillip Lowe said emergency measures to stave off a European debt crisis had gone some way to restoring investor confidence, but doubts could resurface.
“Despite the recent announcements having stabilised confidence in Europe, concerns about public finances could build again,” Lowe said in speech to investors in Sydney.
“If they did, it would weigh on growth prospects for the countries directly concerned, and it could also weigh on prospects in Asia, particularly if it were associated with a marked increase in risk aversion globally.”
Faced with spiralling debts and a market hammering that raised fears of a second financial crisis, the European Union and International Monetary Fund last week set up a trillion-dollar safety net to rescue tottering economies.
Lowe said the RBA would be “watching carefully over the weeks and months ahead to assess how the balance of these risks is evolving”, with the crisis in Europe, especially Greece, showing how circumstances could change quickly.
“If they do, Australia is in the fortunate position, as are a number of countries in Asia, of having the policy flexibility to be able to respond,” he said.
Australia was benefiting from Asia’s strong recovery from the global financial crisis led by China, Lowe said, with demand for its resources expected to underpin a significant economic boost.
“Australia’s terms of trade are expected to regain their peak of a couple of years ago… bring(ing) them back to around the very high level they reached in the early 1950s,” said Lowe.
The prices of steelmaking ingredients iron ore and coking coal had risen particularly sharply in the past six months, and “strong growth in Chinese demand for steel could be expected for quite a few years yet”, he added.
“And over a slightly longer horizon, Indian demand for steel, which currently is relatively low, could also be expected to grow strongly,” said Lowe.
The outlook for the emerging liquefied natural gas sector also remained “very positive”, he said.
But Lowe warned that the spoils of the renewed resources boom needed to be saved rather than splurged to combat inflationary pressures.
“If this lift in saving does not occur, then demand in the economy could well be stronger than forecast, and this would put additional pressure on capacity,” he said.
The remarks follow Treasurer Wayne Swan’s vow to cap spending growth at two per cent of GDP as he delivered a low-spending annual budget on Tuesday which promised to return the economy to surplus by 2012-13.
Swan said the budget was a “solid buffer” against Europe’s debt crisis, and would be underpinned by an Asia-driven surge in commodity prices that was expected to inject 30 billion dollars (27 billion US) into the economy.