ARE WE IN RECESSION OR NOT? SEEMS SO ! ! !

RBA Governor: Confidence the key

Reserve Bank Governor Speech: “The Road to Recovery”

• The Reserve Bank Governor has also mentioned the ‘R’ word – recession. But while he thinks that the economy is experiencing the first recession in 17 years, Glenn Stevens has been actively stressing the positives as well as the negatives.
• The Governor says that the best thing Australians can do is “to maintain confidence in ourselves and the prospects for our country over time.” Stevens noted further: “Optimism, combined with an awareness of risk, is a fundamental strength.”
• Glenn Stevens has unveiled the “Super Six” – six reasons for Australians to be optimistic about the future.

What does it all mean?

• The Reserve Bank Governor gets it. Hopefully other public officials will also eventually get it. That is, it’s all about confidence. While Australia has been dragged into recession by the global economy, the important point is to highlight the positive factors that will drive the economy forward in coming years.
• This is one of the most important speeches delivered by the Reserve Bank Governor, providing a clear and balanced assessment of just where we are at present and where we are going. It is a speech deserving to be read closely and reported widely.
• Glenn Stevens is no gloom and doom merchant. While the global economy may be a gloomy place, he sees plenty of reasons to be positive, not negative. The fact that the Governor is focussing on the opportunities ahead as well as the risks is incredibly encouraging.
• It may come to be known as the “Super Six” – Glenn Stevens’ six reasons to be upbeat on Australia’s economic future. Political stability, strong banking sector, solid public finances, sensible policy, openness to trade & investment and exposure to Asia are regarded as factors that few other countries can emulate.
• All Australians should celebrate the fact that we have a central bank governor with such pride in our economy. It is a sense of pride that all holding public office should emulate.
• While upbeat about Australia, the Governor has not minced words about the crisis imposed on Australia, referring to the ‘mess’ in the financial systems of the US, UK and Europe.

What did he say?

Selected Comments:

• Confidence: “Turning closer to home, Australians cannot do a great deal to make these improved international conditions come to pass. But we can maximise our chances of benefiting from a new international expansion.
• The first thing is to maintain some confidence in ourselves and the prospects for our country over time. We cannot achieve effortless prosperity either on the back of ever‑escalating mineral prices or simply by bidding up the prices of our houses. It is as well to realise that. But as I have said on previous occasions, Australia’s genuine long‑term economic prospects remain good, and there remain good grounds to think that we will continue to weather the storm better than most.”
• Reasons for the global recession: “The weakened ability of the financial institutions to provide credit to industry is one of the factors at work, but in my judgment a bigger one is the decline in confidence, and the sudden and widespread aversion to risk, among firms and households all over the world. It seems that everyone, everywhere, having seen the instability in financial systems in September and October 2008, and consequently feeling poorer and fearing bad times ahead, simultaneously decided to pull back their own spending, curtail their expansion plans and reduce their debt.”
• Domestic recession: “Whether or not the next GDP statistic, due in early June, shows another decline, I think the reasonable person, looking at all the information available now, would come to the conclusion that the Australian economy, too, is in recession.”
• Recession: “Most of the time, economic activity expands, as population growth, increasing wealth and aspirations to higher living standards lead to more demand, while a growing workforce, higher productivity and technological innovation push up supply capacity. That is the normal situation for an economy. But every so often – on average about once every seven or eight years, but not regularly enough to predict with accuracy – a set of conditions arises that sees demand weaken for a while, output decline and unemployment rise. That is a recession. Usually, though not always, inflation tends to fall as a result of such episodes.”
• The Super-Six: “I suggest that Australia has a very good chance of offering an economic setting in which the following conditions hold.
• First, political stability remains assured – something becoming a bit less common.
• Second, the Government does not own, and has not had to give direct financial support to, the banking system. Australia will be free of the difficult governance and exit strategy issues that such support is raising in a number of countries.
• Third, public finances remain in very sound shape, with modest debt levels and a medium‑term path for the budget back towards balance. Without the massive obligations arising from bank rescues that will inevitably narrow the options available to governments in other countries, Australia should be able to articulate such a path more effectively than most.
• Fourth, sensible policy frameworks – both macroeconomic and microeconomic – remain in place; the financial regulatory system is strong and tested.
• Fifth, we remain open for trade and investment, and have a capacity to deploy both our own and other people’s capital carefully and profitably.
• Finally, there is an exposure to, and an engagement with, an Asian region that still has the most dynamic growth potential in the world, where hundreds of millions of people will for decades to come be seeking rising living standards.
• There are rather few countries that have the potential to offer so attractive a proposition to international capital, and to their own citizens, over the years ahead. It is a proposition that, if pursued sensibly and consistently, offers the most secure basis for confidence in Australia’s future. It is such confidence that, more than anything else, will help to drive us along the road to recovery.”
• How does the global economy recover? The Reserve Bank Governor says that the “mess” in the US financial system needs to be sorted out; monetary & fiscal policies need to provide support; exit strategies need to be employed; and that global imbalances need to be addressed.

What are the implications for interest rates and investors?

• The Reserve Bank Governor’s optimism on the future certainly doesn’t appear to be laying the groundwork for future rate cuts. The latest RBA Board minutes highlighted the significant amount of stimulus being applied, and the Governor is indirectly highlighting the same in his speech.
• The Reserve Bank Governor believes that the economy is in fundamentally strong shape with the main risk being a further erosion of confidence.

Source Craig James, Chief Equities Economist, CommSec