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BFCSA: RBA Glenn Stevens warns on myth had developed that Australia had a “miracle” economy

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RBA boss Glenn Stevens warns complacency will deepen downturn

Economics Correspondent

EXCLUSIVE: RBA governor's reality check

In an interview with The Australian, Glenn Stevens warns investors not to count on a rate rise anytime soon.

RBA boss warns of complacency

Reserve Bank Governor Glenn Stevens at the RBA offices in Sydney. Source: News Corp Australia


RBA governor Glenn Stevens has warned that a dangerous complacency about Australia’s economic growth is letting political leaders defer tough decisions on the budget and risking a much more serious downturn when the next one occurs.

In an exclusive interview with The Weekend Australian, Mr Stevens said a myth had developed that Australia had a “miracle” economy that was somehow immune from the turbulence affecting the rest of the world. “We are creating a narrative here about the 23 years of no recession as though this is some miracle and we’ve ­advanced smoothly without any setback, but that’s not really true.”

He noted that in both 2000 and 2008, Australia’s economy had contracted for one quarter, while the jobless rate had risen by a percentage point.

He said the reason these downturns had not been more severe was because of the strength of economic policy beforehand and a dose of good fortune.

“It isn’t because we’re a miracle economy and it’s not because we’re geniuses in government or the central bank,’’ he said.

“I do think though that good policy frameworks, careful policy development and implementation does make a difference.

“It’s a myth really that this economy doesn’t have downturns.

“We do have them; we will have them. We happen by either good luck or good management or both to have had pretty shallow ones, the last couple of times. Long may that be so — we should be doing what we can to give us the chance for the future downturns to be short and ­shallow.”

Full interview transcript

A failure to tackle the budget deficit would erode confidence and ­expose Australia to much greater risk.

“I would fully expect within over the (next) 10-year period, there will be a downturn for some reason of some depth.

“The question is: can we be in a position to do the things that would make it a shallow and short one?’’ he said.

“Having a strong fiscal position ahead of any such downturn, which stood us in very good stead in 2008, would be one such thing and a sound monetary policy framework is obviously another.”

He did not want to comment on delicate ­discussions over the passage of the government’s budget through the Senate, however he said there had to be a way of closing the budget gap.

“As a country, we have voted for some quite important things that are in the education, disability and some other spaces. These are all good things.

“We didn’t actually vote for the revenue to fund them just yet and so that’s the kind of fundamental issue that will emerge more clearly in a few years’ time,” he said.

“If we can’t find some way of putting together a set of fiscal ­accounts that at least begin the process of addressing these ­medium-term issues with measures that start small but then build over time, if we fail to manage to do that here, I’m not sure that this would fill one with great confidence in our capacity to deal with the genuinely serious problem when one day that emerges.

“Sooner or later something will happen that will bring this stuff into a sharper focus, ­especially if we delay action,” he said.

“We shouldn’t leave it until the gaps emerge and a time when ­financial markets might not be so forgiving as they are now to start the measures that will deal with that. We should be starting in a measured way now.”

It was too soon to tell whether the slump in consumer confidence that accompanied the May budget would be ­sustained, noting that confidence fell after last year’s budget but then recovered. Political agreement on closing the budget deficit would be a boost to confidence.

“I think the thing that’s most conducive to confidence is a sense among the community that … the political leadership on all sides has a grasp of the problem, a ­balanced sensible assessment of the issues we face and can agree on some plans to deal with it.”

He was optimistic about Australia’s outlook, but said it confronted challenges in the near future as the economy adjusted to falling investment in the resources sector and as central banks, led by the US Federal Reserve, started lifting their interest rates.

“We’ve got very low interest rates but quite a high exchange rate, so things pulling in opposite directions … the truth is, it would be foolish I think to pretend that one can precisely forecast in that effect of all those forces.”

He could not predict how long the bank would keep its cash rate at its current ­record low of 2.5 per cent, noting that financial markets were ­predicting a rate cut by early next year and a rate increase in the longer term. “I’ve got no particular view to report about that sort of expectations at the moment.”

The eventual increase in rates in the US, likely next year, would be disruptive to global financial markets and could be the catalyst for a fall in the Australian dollar.

“The likelihood of some disruption in markets is probably pretty high because it always is when the Fed eventually changes course. It’s hard to see how most of those metrics would have the Aussie dollar quite this high.

“That’s why we’ve said that our sense is that some of the ­investors are maybe under­estimating the probability of a material decline at some point, but I can’t say when that might be.”


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Guest Tuesday, 20 October 2020