13/06/2012 - 10:35

Important to keep economy in perspective

13/06/2012 - 10:35


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The key numbers in Australia firmly make the case for a glass half full stance.

The key numbers in Australia firmly make the case for a glass half full stance.

As we meet here, economic discussion in Australia has reached a rather curious position. 

Consider the background. Australia avoided a deep downturn in 2009, when most countries did not. A large number of businesses and jobs were saved by that outcome – though we will never know how many.

Almost as a matter of arithmetic, the ensuing upswing was always going to be of the moderate variety. Even so, three and a half years after the depths of the crisis in late 2008, this unspectacular growth has nonetheless seen real GDP per capita well and truly pass its previous peak. 

This is something yet to be achieved in any other (major, industrial) nation. According to data (published last week) by the Australian Statistician, real GDP rose by over 4 per cent over the past year. 

This outcome includes the recovery from the effects of flooding a year ago, so the underlying pace of growth is probably not quite that fast but it is quite respectable – something close to trend.

Unemployment is about 5 per cent. Core inflation is a bit above 2 per cent. The financial system is sound. Our government is one among only a small number rated AAA, with manageable debt. 

We have received a truly enormous boost in national income courtesy of the high terms of trade. This, in turn, has engendered one of the biggest resources investment upswings in our history.

To be sure, we face considerable structural adjustment issues arising from the mining expansion and from other changes in the world economy.

These are not easy to deal with (though they are not insurmountable). And we live in a global environment of major uncertainty, largely because of the problems of the euro zone. 

Nonetheless, an objective observer coming from outside would, I think it must be said, feel that Australia’s glass is at least half full.

Yet the nature of public discussion is unrelentingly gloomy and this has intensified over the past six months. Even before the recent turn of events in Europe and their effects on global markets, we were grimly determined to see our glass as half empty. 

Multi-speed economy

Much of our public discussion proceeds under the rubric of the so-called ‘two-speed economy’. It’s become very much the description of the moment, and not only in Australia. One picks up the same theme in many other countries. 

We have long had a multi-speed economy. For example, it has been a very long-running trend that population growth tends to be faster in Western Australia and Queensland than in Tasmania or South Australia.

Moreover, while we debate the rise of mining and the much-heralded ‘decline of manufacturing’, we might note that it has been a very long-running trend that output and employment in manufacturing have grown more slowly than in the economy as a whole, and that output of various kinds of service provision has grown faster. 

Behaviour of households

But there is another aspect of the ‘multi-speed’ experience, which I suspect explains a good deal of the dissatisfaction we see, and it has to do with the behaviour of the household sector. 

Some parts of the economy that depend on household spending are still experiencing relatively weak conditions, compared with what they have been used to. 

But this isn’t because the mining boom spillovers have failed to arrive. It is, instead, the result of other changes that actually have nothing to do with the mining boom per se but a lot to do with events that occurred largely before the mining boom really began.

In brief, household spending grew faster than income for a lengthy period up to about 2005. The arithmetically equivalent statement is that the rate of saving from current income declined, by about 5 percentage points, over that period.

It was no coincidence that households felt they were getting wealthier. Gross assets held by households more than doubled between 1995 and 2007. The value of real assets – principally dwellings – rose by more than 6 per cent per annum in real, per capita terms over the period.

Only a small part of this was explained by an increase in per capita expenditure on dwellings. The bulk of it came from rising prices. Moreover, a good deal of borrowing was done to hold these assets and household leverage increased. 

The ratio of aggregate household debt to gross assets rose, peaking at 20 per cent. There was definitely a large rise in measured net worth but, relative to aggregate annual income, gross debt rose from 70 per cent in 1995, to about 150 per cent in 2007. 

It is still not generally appreciated how striking these trends were. It is very unusual in history for people to save as little from current income as they were doing by the mid-2000s. 

And it is very unusual, historically, for real assets per person to rise at 6 per cent or more per annum. It is also very unusual for households actually to withdraw equity from their houses, to use for other purposes but, for a few years in the mid-2000s,                                                                                                      that seemed to have been occurring.

I think this is a profoundly important point and worth emphasising. The decade or more up to about 2007 was unusual. It would be quite surprising, really, if the same trends – persistent strong increases in asset values, very strong growth in per capita consumption, increasing leverage, little or no saving from current income – were to re-emerge any time soon.

But the key message for today is that the multi-speed economy is not just about the mining sector squeezing other sectors by drawing away labour and capital and pushing up the exchange rate. It is doing that but slower growth in sectors that had earlier done well from unusually strong gains in household spending would have been occurring anyway, even if the mining boom had never come along.

It is these changes in behaviour by households, in asset markets and in credit demand that I think lie behind much of the disquiet – dissatisfaction even – that so many seem to have been expressing.

*This is an edited extract from Reserve Bank governor Glenn Stevens’ address to an American Chamber of Commerce (SA) Internode business lunch last week.


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