Above is an interesting extended interview with Westpac’s chief economist, Bill Evans, aired last night on ABC’s The Business. In the interview, Evans provides his views on the post-mining boom economy, including his outlook for interest rates, the currency, and house prices. Key points include:
- June’s capital expenditure (capex) data was disappointing. Expected mining capex fell sigificantly, whereas there was surprisingly no pick-up in non-mining capex.
- Business confidence remains fragile. While a new stable government should help at the margin, the high currency is having a significant adverse impact. The currency needs to fall to around $US0.70.
- Consumer confidence has held-up better, due largely to the reduction in interest rates, which has improved cashflow and views about their finances. However, they remain concerned about employment, which is related to the low level of business confidence.
- Interest rates will continue to fall in order to help economy via: improved cashflow, increased consumer spending, and downward pressure on the currency.
- House price inflation will continue, which will help the economy via the wealth effect. However, it won’t get out of control, as consumers will remain cautious overall. Rising house prices will also be required to boost dwelling construction.
- Aggressive fiscal tightening is not warranted, given the economy remains fragile. Australia has low public debt, so some further increase is not a problem.
- With the economy facing stiff structural headwinds as households deleverage and the mining capex boom unwinds, Evans wants to see the government significantly boost infrastructure investment, which he sees “as the next big story for the Australian economy…[needed to]…boost productivity and help us grow our population more rapidly”.
While I am generally a fan of Bill Evans’ work, I had mixed feelings about this interview. While I agree with the outlined structural headwinds facing the economy and the need to boost infrastructure investment in order to fill the mining capex hole and improve productivity, I do not see why Australia needs “to grow our population more rapidly”.
Australia’s population growth is too high already, placing significant strain on our cities’ infrastructure, housing, productivity, environment and living standards. There are also big question marks over whether high population growth actually improves GDP growth when measured on a per capita basis. And of course a bigger population dillutes Australia’s per capita endowment of resources, meaning that we have to sell-off our resource base quicker just to maintain our standard of living (see here and here for an overview of the issues). Increasing the provision of infrastructure merely to import more people is like a dog chasing its tail and seems self-defeating.
Evans’ view that rising house prices are good for the economy because of the “wealth effect” is also short-sighted, and doesn’t take account of the deleterious impacts on overall productivity (i.e. too much of the nation’s capital pouring into non-productive housing), adverse distributional impacts (e.g. wealth transfer from young to old), or the potential risks for financial stability.
Finally, Evans says nothing about needing to improve Australia’s productivity via a broad-based agenda of micro-economic (structural) reform, which is the key to boosting living standards in the long-run.