Why does Captain Glenn say one thing and do another? His speech today mostly makes sense and it’s good to see some pressure applied to governments to free up housing supply, yet the bubble keeps on growing…
Glenn Stevens Governor
Address to CEDA Luncheon Adelaide – 3 September 2014
Thank you for the invitation to visit Adelaide.
As you know the Reserve Bank Board met here yesterday and decided to leave the cash rate unchanged. The statement issued after the meeting gave the reasoning for the decision, in the usual concise fashion. Today I will give some broader remarks about the global and domestic economies and financial conditions.
The global economy has continued its expansion this year. Estimates for global growth are running at about3¼–3½ per cent. This is a bit better than the 2013 outcome and close to, albeit a little below, the three-decade average, which is 3.6 per cent. We are now in September, so unless something pretty dramatic happens soon in one of the large economies, those estimates should be a pretty accurate guide to the annual outcomes.
For Australia’s particular group of trading partners, weighted by export shares, growth is running at about4½ per cent, which is somewhat above the 30-year average. This strength reflects the continued increase in the weight of China as a destination for exports. Even though China is growing more slowly than it used to – at a mere 7½ per cent this year – the fact that its growth is so much stronger than most others combines with its increased weight to push up the weighted-average growth of our trading partner group.
The determined pessimists among us will see the increased weight of China as a concern: what if something goes wrong and the Chinese economy experiences a sharp slowing in growth? In fact this is a question that could be put for most economies now – nearly 50 economies, including the United States, European Union, Japan, Russia and Canada, now have China as their number 1 or 2 trading partner. The full ramifications of the continuing rise in the weight of China’s economy and, in time, its financial system in world affairs will be the topic for numerous lengthy books. But in short, the whole world is now more dependent on China than it was.
For today, probably the most important point to note is that the near-term task of the Chinese authorities is to manage the desired slowing in credit growth and moderation in asset values. Housing prices are falling in many Chinese cities at present. This is not unprecedented – it is the third time in the past decade this has occurred. (Yes, house prices can fall, even in China.) This area – the asset price and credit nexus – is the one to watch, more than the monthly exports or PMIs and so on.
One of the most remarkable features of the international scene is the exceptionally low volatility of financial prices and the compression of risk premia. Yields on sovereign debt of the major countries are very low, the lowest on record in some cases. Spreads on investment-grade and financial corporate bonds have reached multi-year lows.
Nowhere is this phenomenon more striking than in Europe. Two years ago, some major European countries faced a crisis of sovereign credit. Their governments were experiencing borrowing rates that suggested that markets had very serious questions about their budgetary sustainability. Now, these same countries are borrowing more cheaply than they did in 2007, prior to the eruption of the crisis – even though they are now carrying considerably more debt than they were back then.[1]
Corporate borrowing costs are similarly low. Investment grade bonds in the US and euro area and Australia are yielding only around 100 basis points more than the equivalent government bonds and even ‘junk’ bonds from these countries are, on average, yielding around 6 per cent or less. Some entities have issued debt with 50 or even 100-year maturities. Given the uncertainty about the state of the world over that horizon, the returns on offer to investors in financial claims seem strikingly low.[2]
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.