The Reserve Bank governor, Glenn Stevens, gave a speech in Brisbane last week to the Economic Society of Australia. Here’s what you need to know.
1. Glenn Stevens needs to work on his stand-up routine
Here’s a central banker joke:
A Reserve Bank governor walks into a business luncheon and says: “As you may know, the Reserve Bank board in fact held its meeting here in Brisbane yesterday at which we deliberated for a very long time and then elected to sit with the cash rate unchanged.”
OK. Maybe you needed to be there.
The punchline is “we deliberated for a very long time”. That line isn’t in the draft of the speech provided on the RBA’s website. Stevens just indulged in a bit of deadpan humour – the joke being that they deliberated for a long time to do nothing.
The problem is those who trade foreign exchange see more meaning in every single utterance of central bankers than Dan Brown does in a Renaissance painting. And so, after he said this, the Australian dollar dropped half a cent in the space of a couple minutes, all because traders thought this made it more likely the RBA will cut rates next month.
Despite deputy governor Philip Lowe confirming the day after that it was indeed a "light-hearted remark", the dollar has stayed down. This is actually something Stevens wants to happen, so perhaps the joke is on those who think he was joking.
2. It really is time to realise the world’s economy has changed since the GFC
Call this the latest episode of comedian Glenn Stevens’s ongoing sitcom, Only Fools and Horses ... Still Think the Pre-GFC Period Was Normal (yes the title needs work).
Stevens noted that Australia’s average growth before the GFC was 3.5%. But then the world did an economic impersonation of Del Boy falling through the bar. Since then growth has averaged about 2.5%. Stevens also noted that other countries such as Korea, Taiwan, Singapore, Hong Kong, New Zealand and Malaysia which have done OK in recent years have experienced a similar drop. He concluded that "Australia seems to be part of a broader pattern here”.
A pretty obvious pattern at that – high growth prior to the GFC, lower growth since.
So the next time someone says that comparing Australia’s economy now with 2007 is a good way to judge which party is better at running the economy, suggest to them they leave the comedy to the professionals – the entire world was doing better in 2007.
3. Getting through the GFC required more luck than having a lot of mining
Stevens noted that we were lucky to have mining to help us through the GFC, but we were also lucky it hit when it did. In 2007, Australia’s level of sub-prime mortgages (high-risk loans made to people with few assets and poor credit history) was low but rising fast. So when the sub-prime collapse happened in America in 2008 it meant that the issue here was still just “a small problem ... [that] stayed small”. Had it occurred a year or so later, Australia’s finance sector would have been much more vulnerable.
He also noted that it was lucky we had changed our behaviour when we did. Our switch to “slower borrowing, more saving” actually occurred prior to the GFC. By the end of 2006 we had already decided enough mad spending was enough.
That switch helped us when the GFC hit, and has also helped keep inflation down during the last few years of the mining investment boom. So well done Australia, we made our own luck.
4. Stevens wants us to build houses
The switch to saving means in Stevens’s view that “households have accumulated a good deal of cash”. He would like to see it spent on building houses, saying: “If anything, we will need to build more dwellings than we have been over recent years.”
But while in the Q&A session afterwards he noted higher house prices was a driver of housing construction, he thought it would be a bad result if lower interest rates just led to “higher prices and not more houses”.
Private housing construction has increased a bit of late, and given the RBA last year also noted the importance of supply-side issues with housing such as land release, zoning, and housing design approvals, I’m not sure Stevens is too interested in lowering interest rates further just to keep fuelling demand.
5. The future is unknown (but don’t worry)
In the past 21 years since our last recession, Australia’s GDP has grown by around 100%. If back in 1991 you had said only 3% of that growth would be due to manufacturing, a smart response would have been to ask: “Where is the growth coming from?”
Stevens posed this same question last week and answered that “most of the time the answer ... is that only part of it will come from the old traditional areas, and a fair bit of it will come from new things, often things of which we are only dimly aware”.
This sounds unnerving – and it is – but Stevens suggests we’re as well placed to achieve this transition to a different economy as ever before.
In the past 50 years whenever our exports boomed, high inflation followed; this time it didn’t. Twenty years ago when our economy changed, it came off the back off a deep recession; this time it hasn’t.
That doesn’t mean though that the change will be “simple and easy”.
He noted that both sides need to continue their current aim for a surplus in the near term, and businesses need to continue to improve productivity “at the enterprise level”. He also referred to the Productivity Commission’s “to-do list” which contains some politically tough measures (for example, dropping support for failing industries such as the automotive sector and tightening requirements for drought support).
Stevens stressed the need for confidence and said that at present it is a bit “subdued”. But he concluded, albeit in his usual understated way, with an upbeat message. Our current solid economic position, together with prudent policies, should mean Australians “reasons for confidence about the future”. And that is no joke.
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