Glenn Stevens: Remarks to the American Chamber of Commerce in
Australia (AMCHAM)
Remarks by Mr Glenn Stevens, Governor of the Reserve Bank of Australia, to the American
Chamber of Commerce in Australia (AMCHAM), Melbourne, 20 March 2015.
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Thank you for the invitation to join you today.
In an audience of business leaders exposed to the American and Australian business
scenes, I might be expected to attempt some comparisons of the two economies.
So I offer the following snapshot.
• In America, growth has improved over the past year, having been much slower than
policy makers would have liked for quite a few years, after a very deep recession in
2008-09. Real GDP per head is 23⁄4 per cent above its previous peak in December
2007.
• In Australia the economy is growing, but has been somewhat slower than we would
have liked for a while. We haven't had a deep downturn for more than twenty years.
Real GDP per head is about 51⁄2 per cent higher than in December 2007.
• In America, the unemployment rate peaked at 10 per cent in October 2009 and is
now at 51⁄2 per cent. The average rate in the new century to date (ie since 2000) is
61⁄2 per cent.
• In Australia the unemployment rate in October 2009 was about 51⁄2 per cent. It fell,
then gradually rose again to be 61⁄4 per cent now. The average in the new century to
date is 51⁄2 per cent.
• In America, inflation is low and asset values have been rising. Interest rates are
extremely low, but the central bank is talking about raising them.
• In Australia, inflation is low and asset values have been rising. Interest rates are
very low, and the central bank has talked about lowering them further.
• In America, international competitiveness is declining due to the rising US dollar.
• In Australia, international competitiveness is improving, due to the declining
Australian dollar.
In America, there is political partisanship across a range of issues, and budget
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stalemate.
In Australia, there is political partisanship across a range of issues and, over the
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past year, budget stalemate.
The result?
American businesses and households seem to be getting more optimistic about the future.
But Australian businesses and households seem to be getting less optimistic about the
future. It would be an interesting lunch conversation to talk about how all those facts lead to
the two differing conclusions about the future.
Admittedly, the global backdrop in some respects is less supportive to Australia than it had
been some years ago. Our terms of trade are falling. They have been doing so for about 31⁄2
years. It had always been understood that this would occur, even if we were not very
accurate in predicting its timing (we predicted it way too early) or its extent: some key
resource prices initially fell a little more slowly, but more recently a good deal more quickly,
than either official or private consensus forecasts had assumed. Nonetheless, the actual
event has been getting much attention. The various ramifications - declining mining
investment, the effects on incomes and government revenues - are the subject of daily
news.
In some other respects, not a lot has changed lately. China continues to grow in size and
importance and to open up. Much was made of China "missing" its 2014 growth target, by
one tenth of a percentage point. (Let us in Australia hope our target misses are all only of
that size.) Much was also made of the lower target set for 2015, but this was always going to
occur, and successive growth objectives are likely to get progressively lower over the years
ahead. An economy as large as China is unlikely to sustain the sorts of growth rates seen in
earlier years. No one grows at 10 per cent forever. Even growth a bit below this year's
objective would still be a considerable impetus to global demand and output. That said, the
outworking of some of the excesses of the earlier period of rapid growth, especially the
period just after the financial crisis of 2008, remains a work in progress and a source of risk.
But in other ways, one could argue that the global backdrop has improved. As I have noted,
the US economy - still the world's largest and most innovative - has gained momentum over
the past year, looking through the temporary ups and downs of the data. For all China's great
importance to Australia these days, a healthy US economy should not be underestimated as
a driver of business thinking and as a trend-setter for financial markets. In addition, the fall in
oil prices, which is mostly the result of more oil being available than used to be the case, is
mainly a bullish development for the global economy in the short term, problems for producer
states notwithstanding. It is a bonus for American consumers certainly.
It is expected that the Federal Reserve will, some time this year, lift the federal funds rate
accelerator off the floor. If that happens there will no doubt be some disruption, as always,
and more so as it will be the first Fed tightening for nine years and the ECB will be easing
policy at the same time. So there is likely to be some turbulence in asset and foreign
exchange markets. On the whole, though, I think we should regard the Fed's likely actions as
a positive development. Fed policy is still likely to be quite expansionary for some time. The
punch bowl isn't being taken away, its contents are just being made a little less potent.
While that is going on our own economy continues its adjustment to the end of the
investment phase of the "mining boom". The massive run-up in resources sector capital
spending that was a natural response to earlier very high prices is reversing, causing a drag
on demand. So we hope for other sources of demand to speed up to help make up the
difference. Some of them are, though not as seamlessly as any of us would like. I've talked a
lot about this before so I won't labour the point. It is a major transition. We can hope to assist
it, and the Reserve Bank is doing that, and will continue to lend what support it can, within
the limits of its powers and consistent with its mandate. The decline in the exchange rate is
assisting the transition (as it assisted in absorbing the earlier phase of the mining boom). But
we have always said we cannot hope to fine-tune this transition, however much we may wish
otherwise.
Looking back at the history of such episodes, of which there have been a few over the past
century or more, if we come through this terms of trade event with neither a major outbreak
of inflation in the upswing nor a major crash in the downswing, even if we have a period of
sub-average growth in the process, we will have done far, far better than in any previous
event of this kind, let alone one of this magnitude. I still think that is the most likely outcome.
Even so, the lower terms of trade mean that, all other things equal, the path of future
incomes is not as high as it might have looked a few years ago. Even allowing for the fact
that we all knew, intellectually, that at least part of the boom was not permanent, there is a
human tendency to project what we see now (good or bad) into the future. Eventually reality
intrudes and we have to re-evaluate. That has happened countless times before and will
again, no doubt.
It means that attention needs to be given to the things that help our economy work to deliver
what we need even with a lower terms of trade. These were the sorts of things that made a
difference before the mining boom. They are not my field of expertise. I can simply observe
that things such as:
open, competitive markets;
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• education and skill building;
• flexibility and adaptability;
• quality public infrastructure;
• strong public institutions, and pragmatic, balanced regulatory arrangements; and
rewards for entrepreneurial risk-taking
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are likely to give us the best chance for the kind of prosperity we seek. Public policy will have
its own contribution in fostering such an environment, but it is businesses (large and small)
and individuals making their own choices that will ultimately deliver whatever success we are
capable of.