In his address in Adelaide yesterday, Reserve Bank Governor, Glenn Stevens, was again surprising optimistic about Australia and how well it is placed to rebound from the current slump.
Yes, he says things are slowing and the economy is all but sliding into recession (and will by most conventional measurements).
But unlike other major economies Australia doesn’t have an impaired financial system, dud banks, no lending and sliding output and hesitant consumers.
Confidence levels have been lowered here, but by collapses overseas reports and events, than what has actually happened here so far.
The above graph used by Mr Stevens in his speech makes the point that our consumer confidence levels are much higher than those in other major economies.
But caution abounds and Mr Stevens says Australians shared in this more cautious behaviour, particularly in the business world.
He told the lunch yesterday:
A range of business surveys indicates that a trend moderation in business confidence that had been occurring for some months turned abruptly much weaker in October, and remained weak thereafter.
There was some recovery in March. (The behaviour of Australian household confidence surveys has not been as weak, as I shall come to later.)
While official data are yet to show it, it is likely that business investment spending is in the process of declining sharply.
Hiring intentions have been scaled back quickly. Residential investment and exports have fallen.
The net result is that the Australian economy has been contracting, though on the best information we have, not at the pace seen in a number of other countries, where quarterly declines in real GDP of 3, 4 or even 5 per cent have been observed in the last quarter of 2008 and are likely to have occurred in the first quarter of 2009.
A key dimension through which Australia experiences the global business cycle is the terms of trade, a gauge of the income gains or losses that international relative price changes impart to Australia.
Over the five years to 2008, a period of exceptional strength in the global economy, the terms of trade rose by about 60 per cent, equivalent to about 12 per cent of a year’s GDP – about $140 billion – in additional annual income.
It was the biggest such gain in half a century. Now, the terms of trade are falling, reversing part, though so far only part, of that earlier gain.
I would like to make two points, however, about those terms of trade swings.
The first is that, in earlier episodes such as in the early 1950s, and the mid and late 1970s, very large terms of trade movements seriously destabilised the economy.
On this occasion, there have been plenty of adjustment challenges – generally coming under the heading of the so called ‘two speed economy’, where the resource intensive regions and industries grew quickly and others slowed.
But for all that, a floating exchange rate, a much more flexible labour market and better macroeconomic policy frameworks have helped the economy adapt to the terms of trade swings without the degree of instability seen in the past.
That is a testament to the arrangements that are now in place.
The second point is that, at this stage, the fall in the terms of trade that is occurring does not seem to be reversing all of the previous rise.
Even with the large falls in prospect for contract prices for bulk commodities, Australia’s terms of trade look like they could, at the end of this year, still be about 40 per cent higher than the average for the period from 1980 to 2000.
Perhaps that will not persist. Alternatively, perhaps what commodities markets are telling us is that some factors beneficial to Australia – foremost the continued likely emergence of China – remain in place.
It is probably not entirely coincidental that the clearest signs of a turning point in economic activity appear to be accumulating in China, though not exclusively there.
Instead, I want to devote some attention to the question: how do we get on the road to recovery?
History shows that recessions come, but also that they end. Can we speed that process?
And to the extent that we have some capacity to shape the next expansion, how might we use it?
The first thing is to maintain some confidence in ourselves and the prospects for our country over time.
We cannot achieve effortless prosperity either on the back of ever escalating mineral prices or simply by bidding up the prices of our houses. It is as well to realise that.
But as I have said on previous occasions, Australia’s genuine long term economic prospects remain good, and there remain good grounds to think that we will continue to weather the storm better than most.
It is noteworthy that in measures of confidence taken from surveys, household confidence has fallen in Australia relative to the ebullient levels of a year ago, but it remains much more resilient to date than comparable results in major countries.
(See the graph at the top of this story)
While households expect unemployment to be much higher in a year’s time, their stated expectations about economic conditions five years from now have barely diminished at all from what we have seen consistently over a number of years.
So notwithstanding their evident caution at present, people remain essentially optimistic about the long term.
Consumer demand in Australia, while weak compared with recent years, is actually at the stronger end of international comparisons among advanced countries.
This presumably owes something to the stimulatory eff
