Australia still trying to unravel policy puzzle - dep gov

(Adds more details from speech, context)

By Swati Pandey

ADELAIDE, April 10 (Reuters) - Australia's central bank is keeping a close eye on how the divergence between a seemingly slowing economy and a strong labour market resolves itself to help determine where policy rates are headed, a senior official said on Wednesday.

Economic growth in Australia slowed sharply in the second half of 2018 and the new year also got off to a shaky start. At the same time, the jobs market has continued to strengthen with the unemployment rate at an eight-year trough of 4.9 percent.

"A critical question is which of these is providing the best signal of the global growth impulse? Is it GDP or the labour market? How can we reconcile the difference?" Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle said in a speech in Adelaide.

The RBA has left rates at a record low 1.50 percent since August 2016 and recently shifted away from its long-held tightening bias to signal rates could move in either direction, depending on data.

Debelle noted that trade tensions were among several factors that have put a brake on global economic momentum. The United States and China have slapped tariffs on each other's goods and have threatened to levy more duties in an escalating dispute that has rattle financial markets and hit business investment.

The two nations are currently engaged in talks to resolve the conflict.

The uncertainty around a trade deal and its impact have already played out in many economies, including Germany with manufacturing activity slowing sharply.

The trade war has not hit Australian shores yet, but overall economic growth still slowed sharply last year largely because household consumption weakened.

"In my view, the main explanation as to why consumption growth has slowed is the low growth in household income, and an increasing expectation that it is likely to remain low," Debelle said.

Wage growth in Australia is at a tepid 2.3 percent, a shade higher than inflation of just under 2 percent.

But while consumption has been unexpectedly weak, other parts of the A$1.9 trillion economy have evolved broadly as expected, Debelle said.

Business investment, outside the mining sector, has expanded at a "good rate." In addition, exporters are experiencing a boom while the services sector, including tourism and education, is also showing strength.

One weak spot is the housing market though residential construction is at a historically high level now. But as house prices fall further dwelling activity is also expected to cool.

"We continue to pay close attention to the housing market developments," Debelle said.

"The critical factor in the future evolution of both arrears and negative equity is whether the household with the mortgage has an income and a job. The labour market is key here." (Reporting by Swati Pandey and Wayne Cole; Editing by Shri Navaratnam)

First Published: 2019-04-10 05:45:17
Updated 2019-04-10 06:06:38

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