Treasurer Joe Hockey delivers the Mid-Year Economic and Fiscal Outlook in December.

Treasurer Joe Hockey delivers the Mid-Year Economic and Fiscal Outlook in December. Photo: Alex Ellinghausen

It's just seven weeks since Treasury Joe Hockey painted a gloomy picture while delivering Treasury's mid-year economic and fiscal outlook (MYEFO). On Friday, the Reserve Bank is likely to say the Treasurer was too pessimistic by upgrading its own forecast for 2014.

Most eyes are focussing on tomorrow's RBA board meeting for any sort of hint about interest rates, but the real news is likely to be in the bank's quarterly statement on monetary policy on Friday. Chances are that the RBA modelling will predict growth closer to 2.75 per cent this year, compared with its November forecast and the MYEFO estimate of about 2.5 per cent. And every quarter per cent helps if you're hoping unemployment won't rise to much more than 6 per cent.

So, what's changed in the last three months? Quite a lot, led by the fall in the Australian dollar, but assisted by dwelling investment finally picking up, business conditions improving, credit demand growing and the world becoming a happier place. Well, most of the world anyway.

The modelling for the RBA's November statement was done with the technical assumption that the exchange rate would stay at what it was at the time – the Aussie worth 95 US cents and 72 on the RBA's trade weighted index. The Aussie is starting this week at 87.6 US cents and 67.7 on the index – down 7.8 and 6 per cent respectively. All other things being equal, that should mean stronger growth, which is why the RBA has been trying so hard to talk the Aussie down.

Back in the August statement on monetary policy, the RBA went a little way towards spelling out how much it thinks a weaker Aussie stimulates growth. Stated the statement:

"A significant depreciation can have a substantial impact on aggregate economic activity. There is a wide range of empirical estimates of such effects, which in part depend on whether the depreciation is accompanied by a decline in the terms of trade. Central estimates from this range suggest that a 10 per cent depreciation of the exchange rate stimulates GDP growth by ½–1 percentage point over a period of two years or so. Further depreciation of a similar magnitude to that already experienced to date could, for example, deliver above-trend growth sooner than currently forecast."

Using the lower TWI depreciation of 6 per cent and taking the midpoint of estimates, if the Aussie stays where it is today, it should add close to another half a per cent of GDP growth over two years, so maybe the better part of a quarter of a per cent this year.

What's encouraging is that all other things aren't staying equal – they're moving in the right direction as well. Average commodity prices in Australian dollars have been rising and IMF forecasts for the overall global economy have been upgraded, but the tapering of the Federal Reserve's printing press activity is keeping the pressure on the exchange rate, thus holding out the promise of receipts for our increasing exports continuing to grow.

Domestically, the main news is that the long-hoped for rise in dwelling investment is happening. In December's MYEFO, Treasurer Hockey downgraded the expected rise in dwelling investment from 5 per cent to 3 per cent. Now that the December quarter figures are in, we're well on the way to doing better than that.

Last week's credit growth numbers and the NAB business conditions survey suggest the non-mining economy is doing better than either the Treasury, the Reserve Bank or the majority of market economists were tipping just weeks ago. What's yet to be seen is whether the non-mining side can build up a sufficient head of steam to absorb the accelerating decline in resources investment as the year goes on – but that decline should have already been in the RBA's November modelling.

If every silver economic cloud tends to have a grey lining, for the Australian dollar's fall, it's the impact on inflation. That same August statement said: "A range of estimates suggest that, other things equal, a 10 per cent depreciation might be expected to increase the year-ended rate of inflation by around ¼–½ percentage point over each of the following two years or so."

And in the November statement, there was this: "A further depreciation similar in magnitude to that seen earlier this year could be expected to see growth return to trend, or even above trend, sooner than forecast and assist with the required rebalancing of growth in the domestic economy. A depreciation of this size could also see inflation move into the top half of the target range for a time."

Thus the Aussie staying where it is should mean the RBA's core inflation measures ticking up towards the top of the two-to-three per cent target.

Which comes back to tomorrow's RBA board meeting. It's a foregone conclusion that interest rates will be kept steady, but the slightly improved growth outlook and the slightly worse inflation outlook could well see the minutes of the meeting in a fortnight tone down what some have been reading as a residual easing bias.

As a sidelight to this big picture, it seems that Treasurer Hockey has missed the sweet spot for his promised but still unpaid $8.8 billion donation to the RBA's capital reserves. Since October, the Aussie dollar's fall means a forex play windfall has been missed but the cost of borrowing the funds has ticked a little higher. On the other hand, the appreciation of the RBA's foreign exchange holdings means it shouldn't need the full $8.8 billion – unless the size of its dividend to the government in the next financial year is important.

Michael Pascoe is a BusinessDay contributing editor.