Saturday Morning Musings – Pollyanna on the Australian economy

Both politics and the economy continue to be very messy.

In Canberra, Mr Abbott’s decision to dump Mr Ruddock as party whip came as a surprise, creating further instability. I would have thought that this was the last thing the Prime Minister needed. I guess that we just have to wait on developments. It’s very hard to comment sensibly on policy  matters at present.

Of more importance, Australian Reserve Bank Governor Glenn Stevens’ opening statement  to the House of Representatives Standing Committee on Economics presented a reasonably sombre picture of the economic outlook. I say of more importance because developments in the domestic and global economies set the immediate frame within which Governments have to move.

In considering Mr Stevens’ remarks, put aside the media coverage of the ABS’s labour force statistics for January with their headline jump in the unemployment rate. Those stats bump around and are subject to considerable statistical error.

Mr Stevens speaks in classic central bankese. The words are qualified and carefully chosen. I think that the first take-home message was this. 

At its meeting in February the Board considered that this revised assessment – that is, sub-trend growth for longer, a higher peak in the unemployment rate, slightly lower inflation – warranted consideration of some further adjustment to monetary policy, after a fairly long period during which the cash rate had remained steady. These were incremental changes to the outlook but all in a consistent direction.

A second message was contained in this paragraph:

The Board is also very conscious of the possibility that monetary policy's power to summon up additional growth in demand could, at these levels of interest rates, be less than it was in the past. A decade ago, when there was, it seems, an underlying latent desire among households to borrow and spend, it was perhaps easier for a reduction in interest rates to spark additional demand in the economy. Today, such a channel may be less effective. Nonetheless we do not think that monetary policy has reached the point where it has no ability at all to give additional support to demand. Our judgement is that it still has some ability to assist the transition the economy is making, and we regarded it as appropriate to provide that support.

I have previously spoken of the global currency wars associated with quantitative easing. In his speech, Mr Stevens referred to the actions of the Swiss central bank in responding to European Central Bank quantitative easing. Then Thursday last week Sweden’s Riksbank moved its main repo rate into negative territory, by 10 basis points to -0.1 per cent, while also launching its own quantitative easing. The move followed four rate cuts in 18 days from the Danish central bank, which has cut its deposit rate – levied on money parked at the central bank – to a record low of -0.75 per cent.

I may be too much of an economic Pollyanna, but I am more positive about the Australian economic outlook than most commentators.

To begin with, the Australian mining investment boom is now flowing into increased production volumes, a trend that will continue. Sure, there is now a price and supply side problem, but that will ease as higher cost producers are forced out, with lower capital expenditure in mining reducing future production increases. If anything, and as always happens, the current slump is laying down the base for the next mining boom. 

The lower Australian dollar is now having flow-on effects in the real economy. In the case of Whitehaven Coal, for example, the rise in the Australian dollar price for coal has greatly eased that company’s refinancing problems. The hollowing out of the Australian economy over the last ten years has reduced its capacity to expand production outside mining, but it is beginning to respond to the lower dollar. The longer the dollar stays down, the greater the effects will be.

The Sydney property boom will end in tears. For the moment, the continued expansion in apartment building is providing an economic stimulus in Australia’s largest city, a stimulus reflected in the differential unemployment figures in Sydney as compared to the much of the country. In nearby Green Square, for example, there are nearly 10,000 apartments due for completion over the next 4 years, adding perhaps 19,000 people to Green Square’s population by 2019. The cranes are everywhere.

The really big drag on growth lies in stagnant personal incomes. The cash Australians have to spend has not been rising, while job insecurity has increased. This trend will continue for the present. However, population increase means that the absolute size of the domestic market should still increase over time. 

As always, one’s perspective is affected by the time horizon adopted. Regardless of that, I struggle to be totally negative except, perhaps, in the short term. Even then, I’m not convinced.

Postscript

Kvd wrote in a comment:

As always, one’s perspective is affected by the time horizon adopted.

Yes, this is almost exactly what I was saying the other day, in that perhaps we are far too much taking into account small inhomogeneous and anisotropic perturbations. This interpretation is explained more fully here.

Me, I'm fully occupied with a Black Friday, followed by Valentines Day. Just a matter of maintaining one's priorities :)

I rather like the idea of “small inhomogeneous and anisotropic perturbations”.

Victoria Thieberger had a useful piece in Business Spectator, What makes Glenn Stevens really nervous. In answers to questions, Glenn Stevens referred (as he has done before) to the absence of “animal spirits.”  This goes to the heart of what I have called the investment strike, the unwillingness of the private sector to invest, to engage in business creation. Meantime, governments are unable or unwilling to invest.

The problem is not unique to Australia, but is part of an ennui that seems to have infected the Western World. The phrase “capital management” is an example of the problem, for it means pay us now. Another example is the desire to acquire infrastructure assets whether from government or private sector, for these offer a reasonably secure if sometimes low return. They do so because they have some element of monopoly.