Low inflation could be a boon: HSBC

Paul Bloxham, chief economist at HSBC Australia, said the “unusual combination” of strong growth and weak inflation has been key to rebalancing the Australian economy.

According to Mr Bloxham, the lower-than-expected rate of inflation has enabled the Reserve Bank to cut interest rates and consequentially support “a pick-up in consumer spending”.

Mr Bloxham said much of the boost has come as a result of the end of the mining boom and decreasing commodity prices, and the effect this has had on job and wage growth.

“High-paying jobs in the mining and related industries [are] being replaced by lower paid jobs in the service industries. Lower wages growth has also helped to boost jobs growth, as firms have been more willing to take on employees they can pay less,” he said.

Mr Bloxham did however note that the rebalancing process has “not been perfectly smooth”, due in part to commodity prices falling more than anticipated and growth being below trend.

“There is spare capacity in the labour market, as not quite enough jobs have been created fast enough to manage full-time employment in the face of the end of the mining boom,” he said.

Mr Bloxham said the lower rate of inflation has “somewhat protected” the economy from the lower wage growth, and that “it is surely better to share the lower national income amongst more households than amongst fewer”.

[Related: Australia headed for ‘growth upswing’]