Rates rise looms was the standard reaction to the speech in Sydney yesterday from Reserve Bank Governor Glenn Stevens, because of his comments on housing , but the speech carried a subtler message.
That’s basically: no more credit-fed, consumer booms of the sort we had from the mid-1990s to 2007.
He warned Australians that we will not be able to borrow and consumer as much as we did in the run up to the credit crunch and recession.
We will have to recast our consumption.
"If global regulators have their way, the world will be characterised by less leverage, and scarcer and more expensive credit, than in the earlier period. We here in Australia have to accept that fact and accommodate it in our thinking.
"One thing this presumably means is that the prominence of household demand in driving the expansion from the mid 1990s to the mid 2000s should not be expected to recur in the next upswing."
That’s as clear a warning to us all that the 65% or so of the national economy accounted for by consumption is a bit high and will have to fall because we will not be able to finance it, as consumers and as a nation.
For investors and others looking ahead that could be very grim news for businesses built on feeding and exploiting consumer demand.
Retailers could have mixed outlooks: the likes of Harvey Norman, JB Hi-Fi and David Jones might find their customers can’t consumer as much, while food groups like Woolies and Metcash, plus cheaper alternatives such as The Reject Shop thrive if they keep control of costs.
Media groups, such as TV, print and radio could find there’s no upturn really if consumer spending remains weak.
Companies in the export sector in manufacturing and commodities will battle, but they will probably find more upside than those companies concentrating on domestic consumers.
The Federal Government will have to take tough decisions, as the Prime Minister warned at the weekend in his 6000 word essay in the Fairfax media. Government spending will have to be controlled and cut wherever possible (but in some uncomfortable areas) to reduce budget deficits and the national debt, while paying for the reform of the health system and climate change.
On top of this there will be the tax changes that could flow from the Henry Review of taxation.
Even though the GST is not included, what’s the betting that the logic of cutting consumption, raising money for reform and other changes and paying off debt, will come via tax hikes for things like the GST?
The temptation is too much. The Government didn’t mention any of that in his speech, but controlling inflation, clamping down on bubbles and hauling back on consumption all has to be done in a co-ordinated way.
We may have escaped the worst of the GFC, but the future ain’t looking too flash either in some respects
Mr Stevens had a warning about resting on our laurels, having dodged the bullet this time.
"Moreover the risks associated with those trends going too far are apparent from events in other countries.
"These risks have been reasonably contained so far in Australia – but it would be prudent not to push our luck here, Mr Stevens said.
That’s why the concentration on his comments on housing also deserves scrutiny.
According to media interpretations of the speech there will be no more rate cuts and there could be a rate rise or two by the end of the first quarter of 2010,
Mr Stevens didn’t say that directly; he can’t, he’s a central banker and despite the improving economic conditions, things are still a bit fragile in the markets and among consumers.
We could still have another nasty collapse that plunges us right back into doom and gloom.
But for the market’s take on it look at the futures market. It agrees and is now pricing in a 1% rise in the RBA cash rate by next July to 4%.
That could be a bit too much, but it is now a very real possibility for the Australian economy, especially if confidence, building approvals, exports, retail and car sales and a few other factors keep improving like they have done since March.
The speech saw the Aussie dollar rise to close to 83 US cents.
Now that the market is convinced rates are going up, the Aussie dollar will start rising, which in turn will clip the tentative recovery in export income, and make imports cheaper.
Mr Stevens told the lunch "We cannot claim that Australia has avoided any downturn at all.
"It appears at this stage, however, that the downturn we are having may turn out not to be one of the more serious ones of the post-War era, in contrast to the experiences of so many other countries.
"It is becoming more common for Australians to see the glass as half full than as half empty.
"Put another way, we can much more easily imagine upside risks to the outlook, to balance out the downside ones, than was the case six months ago," he said.
And that’s the bottom line, so far we have escaped the worst of the slump, but we are now faced with handling the challenges of that near miss, not doing whatever has to be done to keep the economy from sliding back into a slump, like the authorities offshore are still doing.
Mr Stevens also told the banks the time was coming to wind back the guarantee of wholesale and deposit funds.
It’s a message the central bank was keen to get out with another senior official, Dr Malcolm Edey, making a similar point to a Senate inquiry in Sydney earlier yesterday.
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