Glenn Stevens: Latest economic and financial developments in Australia
Opening statement by Mr Glenn Stevens, Governor of the Reserve Bank of Australia, to the
House of Representatives Standing Committee on Economics, Sydney, 24 February 2012.
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When we last met with the Committee in August, we had entered a period of heightened
uncertainty about the global economy and financial system. The investment community was
focusing increasingly on the high levels of public debt in major countries, and especially on
the situation in the euro area, where budgetary pressures, banking pressures and
competitiveness issues within the single currency area make for a very difficult set of
problems. There was considerable instability in markets. But our view at that
time - tentatively - was that we were not witnessing a repeat of the events of late 2008.
Admittedly, the second half of 2011 saw some very anxious moments. There was a flight
from risk that pushed up borrowing costs for major countries like Spain and Italy, but pushed
them down for countries like Germany and the United States to the lowest levels for more
than 50 years in spite of the fiscal challenges the US itself faces. Funding markets for
European banks in particular effectively closed for a few months, and for other banks
became much more difficult and certainly more expensive.
The palpable fear before Christmas that Europe was on the brink of some sort of very bad
financial event has lessened over our summer. The anxiety has not gone entirely away, and
nor will it for some time. But the worst has not happened. Financial markets, while hardly
brimming with confidence, have recovered somewhat over the past couple of months. Banks
are able to access term funding markets again, albeit at higher cost. High-frequency gauges
of business conditions and confidence have stabilised over the past couple of months in Asia
and North America, and even in Europe. We have not seen the very steep fall that we saw in
all these indicators in late 2008.
The actions of the European Central Bank contributed greatly to the stabilisation of financing
conditions, essentially by removing, for a time, questions over the funding of European
banks. The efforts of European leaders to craft a stronger framework for euro-wide
governance on the fiscal side have also continued. A great deal more needs to be done to
place European banks and sovereigns onto a stable footing, and to boost potential growth in
Europe. But progress is being made.
Forecasts for the global economy in 2012 have been marked lower, mainly due to the effects
of the problems in the euro area. Revisions to the IMF's forecasts in particular have been
given great prominence. Our own forecasts have come down too, though they had already
been a bit weaker than the IMF's. On these forecasts, global GDP will grow by about 31⁄4 per
cent in 2012. That is down from about 33⁄4 per cent in 2011, which was about the average
rate of growth over the past 15 years. On its face, this performance, should it occur, would be
no disaster. After all, growth is going to be below average some of the time.
If we look for things to worry about, we will certainly find them. The global outlook has a very
uneven composition: some countries, particularly in Europe, will record very weak outcomes.
Moreover it is unlikely that a moment will come any time soon when we will be able to say
the problems in Europe are behind us. Progress will be slow and there will be periodic
setbacks and bouts of heightened anxiety - that is the nature of these things.
But equally, we should recognise that things have not been uniformly bad recently. The
US economy has not experienced the "double dip" some had feared six months ago, but
instead has continued growing. The US corporate sector is in very strong shape, is cashed
up and will at some point be able to start moving ahead more quickly. It appears American
corporations have stepped up the pace of hiring in the past few months.
In China, the slowing in growth we have seen seems to have been roughly what the
policymakers were looking for, and they appear to be getting on top of their inflation and
housing boom problems. Around the rest of Asia, activity has also slowed, in part reflecting
trade links with Europe. But it has not slumped and as inflation comes down, policymakers
have increased room to respond. The pressure on European banks to shed assets has led to
some tightening of trade credit in the Asian region, but at this stage the system seems to be
adjusting to that without major drama. We have not, to date, seen the collapse of trade credit
and trade flows we saw in late 2008.
Commodity prices, which had declined noticeably from their peaks in the first half of 2011,
have actually moved sideways, or in some cases picked up a bit, for a few months now. They
remain high by historical standards. That seems roughly consistent with the group of
countries that makes up Australia's main trading partners expanding at a reasonable
pace - expected by the IMF to be over 4 per cent this year, not very different from last year.
Again, we do not, at this point, see the signs of the rapid collapse in global demand we saw
three years ago.
At home, most of the information coming in suggests the economy has grown at close to an
average pace over the past year. This outcome was weaker than we had expected a year
ago. It was partly due to the effects of flooding on resource production but also due to softer
outcomes in the non-resource side of the economy. CPI inflation has come down, as
expected, as the impact of last summer's floods on food prices reverse. In underlying terms,
inflation was about 21⁄2 per cent over 2011, also a slightly lower outcome than we had, at one
point, thought might occur. The labour market was generally softer in 2011 after a year of
unusual strength in 2010 (though the unemployment rate at its latest reading was virtually
unchanged from a year earlier).
These changes to the macroeconomic picture, against a backdrop of a period of intensified
international turmoil, saw the Board lower the cash rate by 50 basis points in the closing
months of 2011. Perhaps surprisingly in the face of developments in wholesale funding
costs, this was initially fully reflected in a reduction in most lending rates, though there has
been a partial reversal of that recently. We have repeatedly made clear that the shifting
relationship between the cash rate and other rates in the economy is a factor the Board takes
into consideration in setting the cash rate. That will remain the case. Recent developments
do not materially affect the capacity of monetary policy to achieve its goals.
Looking ahead, the Bank's central expectation is for growth to be close to trend, and inflation
close to the target, over the coming one to two years. There are, naturally, risks surrounding
this central view. Those are spelled out in the latest Statement on Monetary Policy.
Perhaps what is most noteworthy about the Australian economy is the way in which the
drivers of growth have changed in recent times. The Bank has spoken at length before about
the terms of trade, and the resulting resource investment boom, which is still building and
which will take the share of business investment in GDP to its highest level for 50 years. We
have spoken also about how, on the other side, household behaviour has changed - people
are saving more and borrowing less. Spending is growing in line with income, but people are
spending their money differently. The retail sector is finding it has to adapt to this changed
environment. Some other industries are struggling with the high exchange rate. Meanwhile
certain service sectors are growing quite smartly. Hence, while the economy overall has
recorded "average" growth, few sectors are in fact experiencing "average" performance
themselves - some are clearly quite weak relative to average, while some others are much
stronger.
The Bank is quite aware of these differences and the pressures they bring to businesses and
individuals. But we also know that monetary policy cannot remove the forces generating
different paces of growth in our economy. We have to keep our eye on the overall
performance of demand and prices. We are acutely conscious that history may offer limited
guidance in assessing the net impact of the disparate and very powerful forces that are at
work. Nonetheless, that is the assessment we must try to make.
Our most recent assessment was that, with growth near trend, inflation consistent with the
target, interest rates about average and an outlook suggesting more of the same, the setting
of policy was about right for the moment. Of course, we continue to reassess things each
month.
My colleagues and I are here to respond to your questions.