We'll beat euro and China crises, says RBA Governor Glenn Stevens
- From: The Australian
- July 25, 2012
THE Australian economy could withstand a downturn in China or the break-up of the eurozone, Reserve Bank governor Glenn Stevens has declared, in a call for greater public confidence in our economic strength.In an upbeat assessment of the nation's prospects, Mr Stevens said the RBA did not anticipate a collapse in house prices and saw a growing number of foreign companies investing in Australia because of its standout performance since the global financial crisis. "It is slowly becoming better recognised that the Australian economy's relative performance, against a very turbulent international background, has been remarkably good," he told a business lunch in Sydney yesterday.
Mr Stevens said sceptics about the nation's economic potential had focused on its exposure to China, its high housing prices and the dependence of banks on international financial markets. "The common element is that recent relative success owes a certain amount to things that will not continue - to luck - and that our luck may be about to turn," he said.
Mr Stevens said concern about a slowdown in China had been exaggerated, while Australia's house prices were the most affordable in a decade. Banks were also in good shape, and were paying back their foreign debts.
Mr Stevens's speech - his second in six weeks arguing that Australians should abandon their pessimism and see "the glass half full" - follows renewed concerns about the European threat to world financial stability and speculation that China's economy is slowing more rapidly than the public figures show.
His comments were welcomed by Wayne Swan, who described them as "a body blow to the doomsayers and scaremongers determined to talk our economy down". "With renewed volatility in the global economy, particularly from Europe, the contrast with Australia's rock-solid economic fundamentals could not be more stark," the Treasurer said.
Westpac chief economist Bill Evans said Mr Stevens's confident assessment of the economy meant no further interest rate cuts were likely before the December quarter. "He would assess that the growth story has improved markedly since the Reserve Bank cut rates in May and June," Mr Evans said. "We need a lot more developments, both globally and domestically, to shift them from their current assessment that growth is at trend."
On the local stockmarket, the S&P/ASX 200 index yesterday resisted falls throughout Asia after heavy losses in Europe and the US overnight, closing 4.3 points higher at 4133.2 points. Investors were encouraged yesterday by the early release of a Chinese manufacturing survey that showed conditions had been improving this month.
Mr Stevens said much of the negative talk about China was based on manufacturing surveys showing production running about five percentage points below average, but this still left industrial production growing at 10 per cent a year, which was far from a contraction. "So far, this is a normal cyclical slowing, not a sudden slump of the kind that occurred in late 2008," he said.
Even if China were to suffer a serious slump, the Australian economy would be supported by a fall in the dollar. "More importantly, we could expect the Chinese authorities to respond with stimulatory policy measures," he said.
Mr Stevens said fears that house prices were at risk of a US-style collapse were also misplaced. He said Australian house prices were not necessarily out of line with those of other countries, despite having declined by only 5-10 per cent from their peaks. House prices were now lower, relative to household incomes, than at any time since 2002. "Five years ago we supposedly had a housing affordability 'crisis', now it seems the problem for some people is fear of houses becoming even more affordable."
Mr Stevens said it remained "a very dangerous idea to think that dwelling prices cannot fall; they can and they have". However, he said stress tests by the banking regulator and the experience of the 2008-09 financial crisis showed the banks could handle a sharp fall in prices and a rise in mortgage defaults. Mr Stevens said a common concern among sceptics about the Australian economy, including the International Monetary Fund and ratings agencies, was the use of international markets by Australian banks, which exposes the economy to any turn in global market sentiment. Since the crisis, however, the banks had been raising more funds from domestic deposits and had been repaying debt.
Australia's current account deficit has been financed, not by the banks, but by global investors flocking to buy Australian government bonds, bringing their interest yields down to the lowest levels since Federation.
Mr Stevens said that in the event of a major financial crisis, possibly caused by the break-up of the eurozone, which caused the freezing of global capital markets, the Reserve Bank could step in to provide liquidity to domestic financial markets. "The vulnerability to this possibility is less than it was four years ago; our capacity to respond is undiminished," he said.
Australia retained the ability to use budget spending and interest rate cuts to support the economy if there were a serious deterioration in the international economy.
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