Glenn Stevens: Recent economic and financial developments in
Australia
Opening statement by Mr Glenn Stevens, Governor of the Reserve Bank of Australia, to the
Senate Economics References Committee, Sydney, 28 September 2009.
* * *
Thank you Mr Chairman. I have just a few opening remarks.
Economic conditions in Australia were generally quite subdued in the second half of 2008
and the first part of 2009. Output was sluggish, hours worked in the economy declined,
unemployment rose and inflation started to abate.
By the standards of past recessions, however, this was a mild downturn. Although the
evidence is as yet incomplete, this episode has been much less serious than those in the mid
1970s, the early 1980s and the early 1990s. It also has been very mild indeed in comparison
with recent outcomes in many other countries, where deep recessions have been
experienced. For the G7 group of advanced countries, for example, a cumulative contraction
in real GDP of nearly 5 per cent was experienced over the four quarters to June this year.
The Australian economy recorded a small net expansion in GDP over the same interval.
So I think it is reasonable to conclude, against the benchmarks of historical and international
experience, that Australia has done quite well on this occasion.
Why was that so?
The key factors have been articulated before, but it may help to frame our discussion here
today if I recount them.
First, our financial system was in better shape to begin with, being relatively free of the
serious problems the Americans, British and Europeans have encountered. Lenders have
some problem loans, as always occurs during a downturn, but these are manageable. The
banking system has continued to earn a positive return on its capital, unlike those in some
key countries. The system has been affected by the spillovers from the global crisis, through
tighter borrowing conditions in international markets, higher spreads and so on. But these too
have been manageable and various policy responses have helped the system to cope. The
Reserve Bank was prepared to expand its balance sheet to assist in maintaining liquidity and
the government guarantees were important in shoring up confidence and maintaining access
to wholesale funding.
Second, some key trading partners for Australia have proven to be relatively resilient through
this episode. The Chinese economy did slow sharply in the latter part of 2008, but quickly
resumed very strong growth. China will easily achieve her 8 per cent growth target this year,
led by domestic demand. Many of our other Asian trading partners have also returned to
growth recently.
Ongoing strength in demand for resources has kept Australian exports expanding. Australia's
terms of trade, even though well off their peak, remain high by historical standards.
Confidence about the future for the resources sector is building quite strongly.
Finally, Australia had ample scope for macroeconomic policy action to support demand as
global economic conditions rapidly deteriorated, and that scope was used. The
Commonwealth budget was in surplus and there was no debt, which meant expansionary
fiscal policy measures could be afforded. In addition, monetary policy could be eased
significantly, without taking interest rates to zero or engaging in the highly unconventional
policies that have been necessary in some other countries.
I have maintained throughout that Australia's medium-term prospects remained good and
that we should not lose confidence. More people seem to be taking that same view.
Measures of business and household confidence have shown a very substantial pick-up from
the low points reached earlier this year. Share prices have risen by almost half. House prices
have risen rather than fallen, though commercial property prices have fallen. People are
realising that, though things have been tough, the worst has not occurred and the future is
looking brighter. Earlier plans for drastic cuts to capital spending look like they are being
reconsidered. Economic growth forecasts are being revised up. A straightforward reading of
the economic outcomes would suggest that the various policy measures have been effective
in supporting demand.
In due course, both fiscal and monetary support will need to be unwound as private demand
increases. In the case of the fiscal measures, this was built into their design. The peak effect
of these measures on the rate of growth of demand has probably already passed. The extent
of support will tend to tail off further over the next year. In the case of monetary policy, the
Bank has already signalled that interest rates can be expected, at some point, to move off
their current unusually low levels, as recovery proceeds.
These adjustments back towards more normal settings for both types of macroeconomic
policy are what should be expected during the recovery phase of a business cycle. Our most
recently released set of forecasts assumes they occur. Such an outcome would mean that
fiscal and monetary policy would be acting broadly consistently, as they did when they were
moved in the expansionary direction when the economy was slowing.
In both cases a degree of policy discipline will be needed. Policy frameworks will be valuable
in enforcing that discipline. On the fiscal side, the forward estimates provide an indication of
the restraint needed to move the budget back towards balance and eventual surplus over
time, as required by the Government's medium-term fiscal commitment.
On the monetary side, the inflation targeting framework the Reserve Bank has been following
for a decade and a half will guide adjustments to interest rates. These will be timely and
ahead of a build-up of imbalances that would occur if interest rates were kept low for too
long.
These frameworks will, in other words, prompt the needed adjustments. It was the
preparedness to make those adjustments in the past, guided by these very frameworks, that
contained the build-up of imbalances in the upswing and which in turn earned us the scope
to take bold measures to support demand when a recession loomed. A continuation of that
approach into the future will serve us well.