RBA Deputy Governor Phil Lowe addressed the Australian Business Economists Annual Dinner last night with a speech titled Building on Strong Foundations.
But it could equally have been titled The Aussie dollar needs to go down and will you PLEASE all cheer up.
Let’s look at the Aussie first. Lowe reiterated the now-familiar mantra that the Aussie needs to go down:
The RBA has been saying for a while now that a lower value of the Australian dollar would be helpful from an overall macroeconomic perspective. If the exchange rate is to play its important stabilising role, it needs to go down when the terms of trade and investment are declining, just as it went up when the terms of trade and investment were rising. To date, as we expected, we have seen some adjustment, but if our assessment of the fundamentals is correct we would expect to see more in time.
It worked. The Aussie, which had been recovering fell swiftly on his words.
He also discussed wages and the impact that the Aussie dollar was having on competitiveness – which is where the real story of Australia’s economic future is.
Lowe said that the idea wages in Australia are to high is a bit of a furphy because, “over the past two decades or so, aggregate wage outcomes have been consistent with the inflation target and with a trend decline in the unemployment rate. They have also been associated with a fairly low share of wages in national income.”
While we need to pay close attention to overall labour costs, these observations point to the conclusion that concerns about the overall level of wages in Australia are, to some extent, really concerns about the exchange rate, with the high exchange rate leading to high wages expressed in foreign currency terms. A lower exchange rate would obviously make a difference to these comparisons.
Boom. It’s the exchange rate, stupid.
Turning to the other main thrust of his speech Lowe entreated Australians to recognise how good we have had it in the last decade when “we had got used to consumption growing more quickly than income. We had also got used to asset prices, credit and fiscal revenues growing more quickly than income. We had got used to employment increasing more rapidly than the working-age population. And we had got used to growth in our real incomes outpacing the rate at which we were improving our productivity.”
This is important to understand about Australia’s economy. We thought all the growth was normal – but it’s not.
So now as the mining boom ends, the country need to be on guard that uncertainty doesn’t become pernicious.
“Uncertainty is also normal. Given this, it is important that we guard against the possibility that this uncertainty mutates into chronic pessimism – that is, for it to become normal for us to think that our prospects are limited. If this were to become our normal mindset, then we would be well on the way to finding ourselves in the very world that we feared,” Lowe said.
Spot on. But this is also a message for our political class who tapped into the fears of the Australian electorate to get themselves in power but seem unable to recognise the behavioural impacts on spending, consumption and economic activity of talking about these fears all the time.
That’s why Glenn Stevens has entreated Australian business to let loose its animal spirits and Lowe, in this speech, makes the case that Australia has a solid foundation for the future.
Indeed he notes that Australia’s proximity to, and connections with, Asia at both a trade and human resource level are the keys to the future. He also highlights that these ties and a strong growth in population will underpin a solid future.
Over the past decade, Australia has had almost the fastest rate of population growth in the OECD and this is expected to continue for some time to come (Graph 4). In a decade’s time, our population is forecast to be 17 per cent higher than it is today – that is an extra four million people.
These people will require somewhere to live, to work and to play. This population growth helps underpin the creation of new opportunities for businesses and for individuals. It means that people can plan with the knowledge that the overall size of the pie is getting bigger.
Indeed it is – now stop being so pessimistic and go and spend.
You can find Lowe’s excellent speech here. It is a must read.