Australia and the world are experiencing a Micawber moment. The economic
prospects aren't reassuring, but there's not a lot we can do except
hope something will turn up. Wherever you turn, the outlook is for
continuing sub-par growth.
According to Dr Min Zhu, a deputy managing
director of the International Monetary Fund, in Australia this week, the
post-global crisis growth cycle may be coming to an end. At the peak of
the crisis in late 2008, most countries gave their economies enormous
injections of fiscal (budgetary) and monetary (interest rate and
liquidity) stimulus to get them moving.
It worked. After an
unprecedented contraction of 0.4 per cent in 2009, gross world product
grew by 5.2 per cent the follow year, by 3.9 per cent the year after,
then 3.2 per cent last year. Notice it running out of steam? At this
late stage it's expected to slow further to 2.9 per cent this year.
If 2.9 per cent doesn't sound too bad, remember the world economy's long-term average rate of grow is 3.5 per cent a year.
In
last month's world economic outlook document, the fund warns that "the
major economies must urgently adopt policies that improve their
prospects; otherwise the global economy may well settle into a subdued
medium-term growth trajectory".
Trouble is, Zhu says most
countries - rich and poor - have little "space" left for further fiscal
or monetary stimulus. Indeed, the policy action the fund is calling for
is more structural than cyclical: "strong plans with concrete measures
for medium-term fiscal adjustment and entitlement reform" in the case of
the United States and Japan, while the euro area "must develop a
stronger currency union and clean up its financial systems".
As
for the emerging market economies, many of them "need a new round of
structural reforms". China, for instance, "should provide a permanent
boost to private consumption to rebalance the growth of demand away from
exports and investment".
Well that's fine and dandy. But though
structural reforms that improve the functioning of the economy may
ultimately have a big payoff, it usually takes ages to come through. And
often there are costs up-front.
In the meantime the world's left,
like Mr Micawber, hoping we turn out to be luckier than the forecasters
expect. And the outlook for our economy isn't all that different.
Reading
from a graph in the presentation to the Australian Business Economists'
annual conference this week by Dr David Gruen, at the time of the
pre-election economic update Treasury was expecting growth of 2.6 per
cent this year, improving to 2.7 per cent next year.
That compares
with the economy's "potential" growth rate of about 3 per cent - the
rate needed to hold unemployment steady. So we can expect a continuing
rise in joblessness. And the boss of Treasury, Dr Martin Parkinson, said
this week that the prospects for the economy had deteriorated a little
since the election.
The pundits seem agreed that the economy could
return 3 per cent growth in 2016. But that's just the nice way of
saying we look like having to endure three years of sub-par growth.
Beaudy.
In theory, we do retain "space" to further stimulate
demand with either lower interest rates or increased government
spending. But rates have already been cut a long way, and the Reserve
Bank seems likely to avoid another cut while we see what difference
those earlier cuts make.
As for the budget, it has been in deficit
for four years already, so no one is keen to go any deeper. At this
stage the Abbott government is following the Labor government's policy
of avoiding taking measures to hasten the budget's return to surplus -
which would, in any case, be counterproductive to some extent at a time
when the economy's weak.
But some of the noises Joe Hockey has
been making suggest he's preparing to step in with big spending on
infrastructure should the end of the mining investment boom cause a much
bigger hole in overall demand than we're expecting. Replacing heavy
investment in mining with heavy investment in infrastructure would make a
lot of sense.
The main thing we are hoping will "turn up" is a
turn down in the dollar. Even the fund said this week it believed the
dollar was overvalued by about 10 per cent. An exchange rate with the US
dollar in the mid-80s would do a lot to stimulate our trade-exposed
industries.
Gruen reminds us that, whereas through most of the noughties
exports of resources made a contribution to annual growth in real gross
domestic product of about 0.4 percentage points, over this year and the
next two or three they will contribute well over 1 percentage point.
The
decline in mining investment - which itself will make a big subtraction
from growth - will also lead to a decline in imports, since mining
investment involves a lot of spending on imported capital equipment.
That's a saver.
And for those who worry we may be blowing up a
housing bubble, Gruen advises that the median capital-city house price
has been roughly steady at four times average household disposable
income for the past decade and at present is a fraction below four.
If
you look at the graph you don't find the ratio has been steadily
climbing over the years. Rather, it was a bit less than three times
during the 1990s, but then jumped to four times in the early noughties
and has stabilised there.
What happened in the early noughties to
bring about this change? The return to low inflation and, with it, low
nominal interest rates for home loans. This fall greatly increased the
amount banks were prepared to lend people on an unchanged income.
Australians used this increase in borrowing power to bid up the prices
of our housing.
