Risk of house price falls abating but climate risks need to be confronted: RBA
In an assessment of the key risks around the outlook for Australia’s economy, the Reserve Bank of Australia Deputy Governor Guy Debelle sees some risks abating but long-term risks like climate change need to be tackled.
Speaking in Sydney at the annual Risk Australia Conference, Debelle believes that “there is evidence that the decline in housing prices has reached its end”.
Here he acknowledged that household spending has been slow but that the better outlook for housing market “may even start to support consumption growth again in the period ahead”.
“There are some near-term downside risks to the consumption outlook, including from a softer labour market. But further out, the risks to the outlook are more evenly balanced,” he said.
On the domestic front, Debelle expects better GDP growth “after a run of disappointing numbers”.
This assessment supported by lower interest rates; the recent tax cuts; a depreciation of the Australian dollar; a brighter outlook for investment in the resources sector; stabilisation of the housing market and ongoing high levels of investment in infrastructure.
“Determining with precision the combined effect of these developments is difficult, but the overall risks appear to be more balanced.”
However, for Debelle, beyond the near-term risks for the economy, climate poses a material risk for the economy and financial markets over a longer horizon.
It’s a warning he already gave earlier in the year and told the risk managers at the event that it is important they have a useful framework to assess this risk to their business.
For Debelle, climate is a challenging risk to assess but an increasingly necessary one.
A challenge to be confronted
He said that businesses need to take account of both the physical risks and the transition risks including the impact of climate change on mortgage.
“As risk manager, you can bring your skills at calculating the expected future value of financial assets across a number of potential scenarios.
“In that sense, climate risk is not that different from other risks, though the challenge of translating uncertain future paths for the climate into paths for the economy and the prices of financial assets is harder than some of the other risks that you generally deal with.
“But it is a challenge that needs to be confronted.”
Indeed the Commonwealth Bank recently announced a number of initiatives to address the climate change challenge including undertaking further analysis of their exposure to physical climate change risk.
Debelle also emphasised the importance of disclosure and gave reference to ASIC's decision to update its existing regulatory guidance to the disclosure of climate change related risks.
While the recommendations of the recent report of the Task Force on Climate-related Financial Disclosures (TCFD) further emphasize the importance of disclosure, he warned that “it is important not just to have disclosure for disclosures sake, but to have consistent and informative disclosure”.
He said that investors need to be able to take account of that information in making their decisions and be able to compare that across companies and across financial assets.
“Risk management under uncertainty is always challenging, but the challenge can be reduced with better and consistent information both in terms of the data inputs and the consistency of the scenarios considered.”