i j macfarlane : observations regarding stability in the australian economy talk by mr i j macfarlane, governor of the reserve bank of australia, to business council of australia annual dinner, melbourne, 8 july 2003. * * * i would like to start by thanking the business council of australia for inviting me to its annual dinner. this is the first such occasion i have attended, and i note that the price of my invitation is that i have to give the after - dinner speech. given the time of day, you will be pleased to hear that i will confine myself to a few simple observations, rather than delivering an economic treatise. some people may be expecting a commentary on the current outlook for monetary policy, but i am afraid they will be disappointed. last week we made a decision on monetary policy at our july board meeting, and it received a lot of press coverage. not everyone agreed with the decision, but i have to say that i was quite impressed with the quality of the discussion it generated. i think there is a very well informed and reasoned appreciation of the conflicting pressures and trade - offs we at the reserve bank face. given that, i am reluctant to add any more at this stage, because, no matter how carefully modulated my comments, i would run a great risk of destabilising a basically stable situation. instead, i would like to move into my talk by starting with the observation that the australian economy has now gained international recognition for its stability, whereas in previous decades it was noted more for its booms and busts. in the jargon of financial markets, investing in australia is now a “ stability ” or “ safe haven ” play whereas formerly it was known as a “ cyclical ” play. the latter term meant that the australian economy did better than the world economy when the world economy was doing well, and worse when it was doing badly. the change in the world ’ s perception of the australian economy from one of instability to one of stability has obvious advantages to us, but it does not eliminate the need for hard policy decisions - it simply changes the nature of those decisions. but before discussing that, i would like to illustrate some of the changes in the behaviour of economic variables that have given rise to the changed perception of the australian economy. the first clear sign that the australian economy was showing a new - found stability was the way in which it handled the asian crisis. although we had a higher share of our exports going to the crisisaffected

asset price boom has turned into a bust, the effect on the macroeconomic policy settings is profound. partly this is because the contracting economy affects the policy settings, and partly it is because policymakers are quick to adjust their levers in an attempt to head off the contraction. again, a comparison with the us makes the point. on fiscal policy, the australian budgetary position has varied little over recent years, with predominantly small surpluses being the order of the day. in contrast, the us budgetary position has moved from a surplus of 2 per cent of gdp in 2000 to an expected deficit of 4 per cent of gdp in 2003. the us has used a huge amount of its fiscal ammunition, while we have not even started to do so. terms of trade march 1982 = 100 index index source : abs national budget balance per cent of gdp % % us australia - 2 - 2 - 4 - 4 - 6 official short - term interest rates % % australia on monetary policy, the contrast between the two countries is equally pronounced. the us put us interest rates up slightly more than we did in 1999 / 2000, but the difference was minor. however, since the us recession hit in 2001, they have reduced their interest rates much more than us. from a peak in the second half of 2000, sources : federal reserve bank of new york ; rba they have come down by 5½ percentage points, while we have come down in net terms by 1½ percentage points. i do not want to give the impression that i think stability of interest rates is a goal in its own right - only that it reflects the greater stability of the australian economy. - 6 sources : commonwealth treasury ; thomson financial datastream again, the contrast in both of the above policy variables between the two countries is as great as the contrast in the other variables i showed earlier, with australia again representing stability and the us instability. equally importantly, stability was not pushed at the price of lower growth : to the contrary, the australian economy has grown faster than the us, not just over the past few years, but over the past decade. this, of course, has been the main point of my presentation this evening. the other point, i hope that has come out, is that the really large examples of instability in recent decades have emanated from a species of financial event - namely, an asset price boom and bust - rather than from the normal cyclical fluctuations we are all familiar with under the heading of the business cycle