GLENN STEVENS: Here Are The Four Things Australia Needs For A Soft Landing From The Mining Boom

Reserve Bank of Australia governor Glenn Stevens delivered a speech today titled “Economic Policy after the Booms”.

On its release at 1.05pm AEST it set the dollar falling with the governor saying that the falloff in resources sector investment could be “quite a big fall in due course”, and said there was still room for more interest rate cuts.

He also said the business community’s subdued confidence was “somewhat concerning” and that rebuilding it would be one of the key things Australia needed to ride out the passing of the mining investment peak smoothly.

It was titled “after the Booms” – plural – to draw attention to not just the passing of the resources investment, but also the end of the credit boom that drove household spending over the past decade.

Here are some of the key points.

There’s a clear statement of ongoing room for interest rate cuts:

We have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand. The recent inflation data do not appear to have shifted that assessment.

Here’s the key excerpt on the end of the resources boom:

It is now well understood that the ‘mining boom’ is shifting gear, and that we are entering a new phase.

The story of the boom has always had three phases. In the first phase, commodity prices rose to very high levels. As a result, Australia’s terms of trade rose to levels not seen in a very long time. These prices had a hiatus in 2009 with the global downturn but resumed their upward trend quite quickly.

In historical context, the high prices have been quite persistent. This led to the second phase, in which resource producers ramped up their investment to take advantage of demand for raw materials, in particular iron ore and natural gas, and to a lesser extent coal. Resource sector investment rose from an average of about 2 per cent of GDP, where it had spent most of the previous 50 years, to peak at about 8 per cent. That big rise is now over, and a fall is in prospect, with uncertain timing. It could be quite a big fall in due course.

He’s also set out the four things he thinks need to happen for Australia to have a soft landing from the mining boom:

For a benign outcome to occur, a few things need to be in place.

– Reasonable global growth outcomes obviously would be a major help. At this stage global growth is sub-par, though not disastrous, with most forecasters saying next year will be better. Most of them quickly add a long list of things that could go wrong. There is nothing we can do about that.
– The second condition, which we can do something about, is that macroeconomic policy settings need to be appropriate. Fiscal policy is in consolidation mode, and that seems broadly appropriate. Monetary policy is, by historical metrics at least, very accommodative. The exchange rate has also declined since its recent highs, and doubts about whether it will play its normal role as a shock absorber have lessened of late.
– A third condition is that Australian businesses need to be internationally competitive. The exchange rate is helping here but productivity and cost performance will also be key. On these fronts, I think firms have stepped up their efforts considerably. This combination is a necessary, though not in itself sufficient, set of conditions for the sort of demand rotation likely to be necessary.
– The fourth ingredient is ‘confidence’. It is somewhat concerning that the business community’s confidence has been quite subdued in recent times. To the extent that substantial structural change has been occurring, and there is inevitable uncertainty over the international outlook, it is quite understandable that some business segments have found the going hard and don’t feel very confident. Moreover, the phase shift of the mining boom itself is dampening confidence in some areas.

Stevens said the RBA’s cash rate cuts to date had boosted non-cash investments to some extent but not enough to preclude future easing.

One of the things we have been watching for as we have been reducing interest rates has been an indication of savers shifting portfolios towards some of the slightly more risky asset classes, as that is one of the expected and intended effects of monetary policy easing. There are clearly signs of policy working in this respect, though not, to date, by so much that we see a serious impediment to further easing, were that to be appropriate from an overall macroeconomic point of view.

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