Warwick McKibbin appears at the AFR today to argue:
Australia is an economy in transition from the largest terms-of-trade boom in history into a world of enormous economic risk and domestic political malaise.
It need not be an economic disaster, as some commentators have suggested – but there are serious head winds.
First, income growth has stalled because of a fall in the terms of trade which is likely to continue.
Second, investment in mining is clearly slowing which will reduce GDP growth. The good news is that productivity in mining should rise as the capital stock comes on line, but this good news is being offset by wage claims and union productivity destroying interventions on mining sites. Businesses, especially trade-exposed companies, are cutting costs as much as possible to survive the rising costs of doing business and a high exchange rate. This slows economic activity in the short term but should have productivity benefits over time.
The biggest risk Australia faces is the political uncertainty which is undermining consumer and business confidence.
It won’t be until the end of 2013 that there is a clear indication of the direction of government policy. The good news is that the portfolio shift into Australian assets has probably passed, partly due to this political uncertainty. A weaker exchange rate is to be expected. This will be a two-edged sword. It will help with the profitability of trade-exposed companies but it will also add to imported goods inflation which will likely push inflation outside the RBA comfort zone.
…With a clear plan for policy reform, a new government after September can get the country in much better shape that it currently is.
Hmm, I sort of agree. The greatest risk is the governmental paralysis that has prevented our elites from facing up to the challenges confronting the economy. That includes absurd Treasury forecasts, a too slow RBA and inappropriate fiscal tightness. This has dented already structurally weak confidence.
However, the economy is still growing at 2.5% and, as McKibbin himself argued just a few months ago when pointing to possible asset bubbles, credit is flowing swiftly enough to households.
A plan for a nation-building program of productivity enhancing infrastructure and for ensuring the exchange rate adjustment is transmitted into real wages would certainly improve the economy versus the counter-factual but I’m doubtful it will be an economy better than today’s.
