Amid all the gloom (which we saw again yesterday with the poor business confidence figures in the NAB’s latest survey, as reported below), Reserve Bank Governor, Glenn Stevens has given an upbeat speech about the outlook.
It wasn’t a needlessly optimistic, spirits-rousing address to business economists in Sydney Tuesday night: it was matter of fact and observant.
It was his final public address for the year and in it Mr Stevens said Australian businesses, financial markets, households and policymakers were living through "interesting times."
But the longer-term outlook was not as bad as some people thought.
"Given the global situation, we have a difficult period to negotiate.
"But we can negotiate it," Mr Stevens said during a speech at the Australian Business Economists annual dinner in Sydney.
"The long-run prospects for the Australian economy have not deteriorated to the extent that some people may presently be feeling.
"We do have reasonable grounds for some quiet confidence about the future, however bad the storm at present may be."
But he did warn that times were tough and would continue that way for a bit longer, but that was no reason to go all gloomy.
Australia isn’t the US, Europe or the UK economies which are already in recession, or Japan where the slump is deepening.
Interest rates will be cut again if need be and soon, if that was required.
Here’s more of the speech and the link to the complete address:
They are tough times, for businesses, financial markets, households and policy makers. Given the global situation, we have a very difficult period to negotiate. But we can negotiate it.
The long run prospects for the Australian economy have not deteriorated to the extent that some people may presently be feeling.
We do have reasonable grounds for some quiet confidence about the future, however bad the storm at present may be.
Longer term, performance will depend on the quality of investment, both public and private, on productivity increasing innovation and reform, and on getting the right balance on regulation.
All that is hard, but at various times over the past couple of decades, Australia has made considerable progress in these areas, and has a pretty good record overall of responding to the need for change, especially in times of adversity.
There is no reason we should not maintain that record.
Looking back over the past six months, Mr Stevens said the economy had seen "significant changes"
The biggest terms of trade boom in half a century is over, and has partly unwound.
I still think that China’s emergence is far from complete and that, as a result, the terms of trade will be higher on average than they were until a few years ago.
But over the next year they will be well below their peak.
Our households like those elsewhere, have observed financial turmoil and a decline in share prices and have become more cautious.
Consumer spending, which slowed significantly in the period from about February to June as interest rates and petrol prices rose, has remained slow since, even as interest rates and petrol prices have fallen significantly.
I think we can expect that households will be more cautious about debt over the next couple of years.
Business investment and government spending have remained pretty strong – so that domestic demand was still 4 per cent higher in the latest data than a year earlier.
But businesses are currently in the process of scaling back plans for investment and hiring.
This is partly in response to slower consumer demand, but the dramatic change of view about international conditions and the general uncertainty reflected in financial market prices are surely playing a major role.
So in the period ahead, private demand could look weaker than it has for some years.
What then do we need to be doing to ensure as far as we can that the period of weakness is brief, and that prospects for longer-term sustainable growth are maintained?
Of course, we cannot change the course of the world economy. But we can keep our own house in order to maximise our chances of good performance.
On this score, as I have remarked before, Australia has scope to use macroeconomic policy to support the economy in the weak part of the cycle.
That scope was earned by being prepared to run budget surpluses and run down public debt when revenues were strong, and by raising interest rates to contain inflation when the economy overheated.
The scope to ease policies is now being used.
On the fiscal side, the ‘automatic stabilisers’ will reduce the budget surplus as the economy weakens, cushioning the economy in the process. That is what they are designed to do.
There has also been a front loaded, discretionary easing that is starting to arrive in recipients’ bank accounts this week.
Of course, a good deal of this may be saved, but even if it is, that presumably takes the place of private saving that would otherwise have been done over a longer period, so it brings forward the point at which households become confident enough to lift spending.
Also on the fiscal front, there is no reason why worthwhile public investment decisions that are currently planned should not proceed, as long as they really are worthwhile.
On the monetary front, interest rates right across the spectrum have fallen.
Some fairly elementary
