Analysis
Updated
"We have climbed back to the top of the leader board —
we are again leading the advanced economies, bettering the average
growth of the OECD and each member of the G7 group of leading industrial
nations." — Federal Treasurer Scott Morrison, June 5, 2018
"We
have very high levels of debt and very high asset prices. That's our
number one domestic risk." — Reserve Bank of Australia governor Philip
Lowe, June 20, 2018These are two very different views, two weeks apart, from the two people running our economy.
Usually, it is the politician that veers towards the negative, for strategic gain over an opponent.
In less than buoyant times, it is central bankers who usually opt for their second most powerful tool after interest rates — the jawbone — to spruik the good times ahead.
But in Sintra, a quaint town just outside Portugal's capital Lisbon, last week, Dr Lowe turned the tables.
It was an esteemed moment for Dr Lowe, seated on a panel alongside the three heavyweights of global monetary power — the European Central Bank's Mario Draghi, US Federal Reserve chairman Jerome Powell and Bank of Japan governor Haruhiko Kuroda.
Each, in turn, turned on the charm, exuding confidence.
Their economies were improving.
Sure, wages growth was slow and inflation persistently low. But the future, they all agreed, looked brighter than it had for some time.
But not Dr Lowe, despite the polar opposite experience from which we've been delivered.
We haven't had a technical recession for 27 years. Our Government finances — unlike the rest of the developed world — are sound. And we've never engaged in the desperate rounds of stimulus his three counterparts had engineered.
But he was clearly concerned. Our astronomical household debt, at around 200 per cent of income, has been poured into real estate, which now is deflating.
While he didn't articulate it, the problem — from an Australian viewpoint — is, with anaemic wages growth, the potential exists for a credit crisis that could leave large numbers of households holding debt above the value of their assets.
That's not his only concern. The looming trade war between China and the United States, which financial markets are blithely ignoring, could develop into something quite nasty — a prospect Dr Lowe described as "incredibly disturbing".
RBA gives up on rate rises
For more than a year, the Reserve Bank has been adamant — the next move in Australian interest rates was up.For all that time, while most economists agreed and duly priced several hikes in this year, your diarist has argued it wasn't an option.
As it transpires, rather than the unfounded optimism which the Reserve Bank now is being accused, it may have been a strategy of jawboning — warning would-be real estate buyers to beware, that rates could rise, and they could find themselves in trouble.
Many major banks have recently altered their rate predictions.
Macquarie last week reckoned we may not see a hike until 2020, if at all. Westpac has been there for quite some time.
Last week, the final confirmation arrived — the RBA finally, and quietly, removed its warning about rising interest rates.
And that begs the question: If we really are the envy of the global economy, why is it that growth prospects elsewhere are pushing global rates higher while there is little, if any, chance ours will rise?
While the Treasurer is correct to laud our most recent performance, when the economy grew 3.1 per cent in the year to the end of March following a surge in exports, a large part of our uninterrupted growth in the past quarter-century is down to population growth.
Take last year's performance as an example. According to the Australian Bureau of Statistics, the economy grew 2 per cent in the year to the end of June 2017.
But, divide that by the number of people, and it was just 0.4 per cent, as the population grew by 1.5 per cent.
That brings us into unusual territory. It's close to two decades since US rates sat higher than ours.
The US already has pushed rates to 2 per cent. There's another two hikes likely this year, pushing America way above our 1.5 per cent.
As in the late 1990s, when American rates surpassed ours, our currency is likely to come under extreme pressure, as it did back then.
That's not an altogether bad thing, as it makes our exports cheaper and boosts inflation. But it could also force interest rates higher and certainly will see offshore borrowing costs rise.
And, with our level of household debt, that's a danger.
Trade trouble and Trump
The prospect of a plunging Australian dollar sent the stock market into overdrive last week.Companies with offshore earnings — particularly those with American subsidiaries — are likely to get a serious currency boost.
That, however, assumes everything else will remain on an even keel. And that's a mighty big "if".
There's a virtual laundry list of potential problems facing the global economy — most of them related to rising interest rates, artificially-inflated asset prices and obscene levels of debt from America, through to China — which has a debt to GDP ratio of 260 per cent — to instability in the Euro region, particularly in Italy.
But the escalating trade war between China, our biggest trading partner, and America, our biggest foreign investor, has the Reserve Bank governor at his wit's end.
Dr Lowe asked the stunned audience in Sintra:
"Can any of us here think of a country that has made itself wealthier and boosted productivity by building walls?"Probably not."
He then went on to outline two scenarios that could bring matters to a head and lay the foundations for a serious financial crisis.
The first was that financial markets could take fright. So far, he said, the reaction has been benign, but that could change quickly.
The second could come from the corporate sector. Already, he said, companies from Mexico to Canada and from China to South East Asia were delaying investment decisions, which ultimately would impact economic growth.
Should those two factors combine, he said it could become a "global event".
No matter what position we're placed on the global GDP pecking order, as one of the world's most exposed trading nations, we will feel the pain.
Over to you, Donald Trump.
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