Couple of frank speeches from Reserve Bank of Australia lately.
Here is another one where RBA Governor Glenn Stevens looks at recent claims that Australia is a lucky economy. It has huge natural resource base and benefited as Chinese growth continued post-crisis. With China slowing now, this good luck likely to end:
It is slowly becoming better recognised that the Australian economy’s relative performance, against a very turbulent international background, has been remarkably good. Many foreign visitors to Australia comment on this relative success and I have noticed an increase in the number of foreign companies interested in investing in Australia as a result, notwithstanding our domestic tendency towards the ‘glass half empty’ view.
But some observers – admittedly not the majority – still harbour concerns about the foundations of recent economic performance and question the basis for confidence about the future. There are several themes to these doubts, but the common element is that recent relative success owes a certain amount to things that will not continue – to luck – and that our luck may be about to turn.
Rapid growth in Chinese demand for resources, for example, has been of great benefit to date, but what if the Chinese economy suffers a serious downturn? Another potential concern is dwelling prices.
Australia saw a large run up in dwelling prices and household borrowing until a few years ago. Some other countries that saw this subsequently suffered painful corrections and deep recessions, associated with very stressed banking systems. Can Australia escape the same outcome?
A further theme is the focus on the funding position of Australian financial institutions, insofar as they raise significant amounts of money offshore. Could this be a weakness, in the event that market sentiment turns?
He analyses each of these claims and says it was not just about luck. The macro policies helped as well. Stable macroeconomic policy framework with floating exchange rates helped ride the tide. I am not getting into details.
In the end:
But what matters more is what we do with what we have. Not every good aspect about recent performance is down to luck. By the same token there are things we can do to improve our prospects – or, if you will, to make a bit of our own future luck. Some of the adjustments we have been seeing, as awkward as they might seem, are actually strengthening resilience to possible future shocks. Higher – more normal – rates of household saving, a more sober attitude towards debt, a re-orientation of banks’ funding, and a period of dwelling prices not moving much, come into this category.
The years ahead will no doubt challenge us in various ways, including in ways we cannot predict. But what’s new about that? Even if the pessimists turn out to be right on one or more counts, it doesn’t follow that we would be unable to cope. Acting sensibly, with a long-term focus, has as good a chance as ever of seeing us through whatever comes our way.
I have read many pre-crisis speeches and even post-crisis ones where tall claims over stable macro policies. So no comments over how things will pan out. Though this is a much balanced outlook from RBA compared to highly overconfident outlooks in the past.
But who really knows. Only time will tell. Once-tigers become pussycats in real quick time and once-praised factors become the curses….