Poor old Wayne Swan and his Koukometer: the idiots just won’t shut up! The latest to join the eminently sensible recession discussion is AMP’s Shane Oliver. His full note is below but in essence he accepts the outline of the risks described here at MB:
Since around August/September last year, when the iron ore price fell sharply and mining companies started cutting investment projects, a cloud has been hanging over the Australian economy. In the last month or so it seems the cloud has got darker. It is increasingly clear China is not growing like it used to be, the mining investment boom has peaked and the rest of the economy has been slow to respond to lower interest rates. The need to transition from growth largely driven by the mining investment boom to more broad based growth is now upon us. Some even talk of recession.
…The current situation is leading some to talk of recession and fears of a scenario that has often been referred to by foreign commentators on Australia. Essentially, it’s argued that Australia has been propped up by a huge mining boom which boosted national income and in turn underwrote a boom in residential property prices. With the mining boom fading, it’s argued the economy will collapse and unemployment will surge triggering a sharp increase in mortgage delinquencies and a collapse in house prices. Ultimately leading to huge problems for the banks.
And what does Dr Oliver think?
Recession is a risk, but as there is still plenty of scope for lower interest rates and a lower $A to boost the economy we think it will be avoided. Just as high interest rates and a high $A put many non-mining sectors of the economy into hibernation over the last few years to make way for the mining boom, this will now go in reverse allowing the pressure to come off these sectors and the economy to return to more balanced growth in 2014, led by the laggards of the last few years such as housing, retailing and domestic tourism. This is actually good news. As a result we put the risk of recession – in the absence of a sharp global slump, which seems unlikely – at a significant but low 15-20%.
There are only a few levers that policy makers, ie, the RBA and the Government, can pull to help the economy in the short term – in fact in Australia (given we have a floating exchange rate) they are just fiscal policy (via the budget) and monetary policy (via interest rates). Right now there is not much willingness to embark on fiscal stimulus, so that leaves lower interest rates. But is cutting interest rates counterproductive because it simply takes money from depositors to give to debtors? I say no. Interest rate cuts help household demand in two ways. First, the Australian household sector owes way more to banks (around $1.7 trillion) than it has in deposits (around $0.75 trillion). So the savings on debt interest payments from lower interest rates are much greater than the loss of interest on deposits.
Secondly, the spending of depositors such as self funded retirees tends to be far less sensitive to changes in their disposable cash flows than borrowers, particularly young families. Sure, initially when rates come down debtors tend to just increase their principal payments but eventually they start to spend some of their savings.
On top of this, lower interest rates help by lowering corporate borrowing costs and forcing investors into more risky assets that help the flow of funds through the economy. Lowering interest rates has the added advantage that it makes Australia a less attractive destination for capital inflows, leading to a lower $A which is now starting to occur. And a lower $A helps boost the competitiveness of industries like manufacturing, domestic tourism, agriculture, mining, etc.
Third, the banks did not pass on the full amount of the initial interest rate cuts in order to maintain higher deposit rates to boost their funding reliance on deposits.
Finally, the $A remained strong, partly because interest rates were too high. This left big chunks of the economy uncompetitive and struggling.
Shut up, Shane! Personally I think the kind of housing and consumption boom that Dr Oliver endorses is as unwise as it is unlikely but be that as it may it’s obvious that rates aren’t low enough to produce the effects Dr Oliver wants, as he argues, even the good ones like a boost to tradables. Yet rates won’t be low enough until the economy is weak enough to justify them and that will be too late given the withdrawal of mining investment keeps going for three straight years.
It’s not often you get to see economic risks approaching so very clearly. Yet we are doing nothing about it. Just how the dills that attack this discussion would keep it.
Australian economy – OI by Shaun Salas
