RBA governor Glenn Stevens yesterday slammed the brakes on expectations around Australia’s potential growth rate in his annual Anika Foundation speech.
Stevens questioned his, the RBA’s, Australian Treasury and the government’s assumptions that Australian trend growth rate is north of 3%. “Data are hinting that our assumptions about trend growth may need to be revisited, that will be worth some discussion,” he said.
What Stevens did was return to a theme he has highlighted many times over the years. That is, Australian economic growth will eventually be constrained by population growth and growth in the labour force.
But what he also did was highlight that there is a difference in growth in an outright sense and growth on a per capita basis.
“It need not be the case that per capita growth would be any lower, if the lower growth simply reflects slower population growth,” he said.
But, here’s the important part. Stevens not only said slower growth had implications for living standards but that Australian business and governments needed to rework their numbers, i.e. their assumptions when planning.
So there may be few implications for living standards as measured by income per head. But if there are assumptions about absolute growth rates embedded in business or fiscal strategies, or retirement income plans, they would need to be re-examined.
Two things matter here.
First he is, in some ways, understanding why businesses might be reluctant to invest if they see this step down in potential growth. But he is also again warning business leaders about setting hurdle rates at such a high level as to render investment unprofitable.
Secondly, he is warning the government that assumptions embedded in the budget papers, and thus deficit and borrowing figures that result from them, could be wrong.
But there is another thing governor Stevens has done by resurrecting this discussion.
Even though he said rate cuts were still on the table he has raised the bar on the next, or any, further cuts.
That’s because in saying that the potential growth rate for Australia might be lower, he is implicitly questioning the RBA’s ability, or indeed need, to materially drive the growth rate much higher than it is via interest rates.
Equally, and important to this debate about growth, he said:
It is not quite good enough simply to say that evidence of continuing softness should necessarily result in further cuts in rates, without considering the longer-term risks involved. Monetary policy works partly by prompting risk-taking behaviour. In some ways that is good: in some respects, there has not been enough risk-taking behaviour. But the risk-taking behaviour most responsive to monetary policy is of the financial type. To a point, that is probably a pre-requisite for the ‘real economy’ risk-taking that we most want. But beyond a certain point, it can be dangerous.
Yes, it’s risk-taking in the real economy. Entrepreneurs taking a risk on start-ups, businesses investing and hiring, that the economy needs.
Not just financial leverage and house purchases.