Why Is Glenn Stevens Suddenly So Negative About The Australian Economy?

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Today marks 30 years since the Australian dollar floated on the currency markets. Right now, it’s at one of its most interesting inflection points in terms of the role it is playing in how Australia’s economy behaves in the globalised economy.

This week in an interview with the Wall Street Journal RBA Governor Glenn Stevens sounded aggressively negative about the prospects of the Australian economy continuing its long period of uninterrupted growth. He said:

We are building up this myth of 22 years of uninterrupted growth. We shouldn’t do that. It’s been 22 years since we had a deep downturn. We’ve had a couple of little ones, but they didn’t last long and they weren’t very deep.

Sooner or later we will have another one. The probability of that is more or less 100%, at some point, but I can’t tell you when.

We would be foolish to think that we have found the secret of completely eliminating the cycle, because we haven’t.

The funny thing is that there is scant evidence that Australians are revelling in a myth of uninterrupted growth, or that they have found the secret of completely eliminating the cycle.

Take the savings rate for example. At more than 11% it is back near recent highs which are the highest level of saving – read spending restraint – since the mid to late 1980’s.
Equally retail sales growth has been weak over the past couple of years and the RBA itself continues to tell us each month: “In Australia, the economy has been growing a bit below trend over the past year and the unemployment rate has edged higher. This is likely to persist in the near term, as the economy adjusts to lower levels of mining investment.”

This is hardly ebullient and the RBA continues to tell us that monetary policy still has some work to do. They also say “the easing in monetary policy that has already occurred since late 2011 has supported interest-sensitive spending and asset values. The full effects of these decisions are still coming through, and will be for a while yet.”

To put further context around the strangeness of Governor Stevens comments just last year he gave a speech in Adelaide titled, “The Glass Half Full” where he noted the contrast between what Australians were feeling about the economy and what foreigners were thinking about Australia:

To be sure, we face considerable structural adjustment issues arising from the mining expansion, and from other changes in the world economy. These are not easy to deal with (though they are not insurmountable). And we live in a global environment of major uncertainty, largely because of the problems of the euro zone. Nonetheless, an objective observer coming from outside would, I think it must be said, feel that Australia’s glass is at least half full.

Yet the nature of public discussion is unrelentingly gloomy, and this has intensified over the past six months. Even before the recent turn of events in Europe and their effects on global markets, we were grimly determined to see our glass as half empty. Numerous foreign visitors to the Reserve Bank have remarked on the surprising extent of this pessimism. Each time I travel abroad I am struck by the difference between the perceptions held by foreigners about Australia and what I read in the newspapers at home.

You have to wonder then what Glenn Stevens is talking about because it seems clear that Australians are not taking growth for granted. Sure house prices and borrowing are higher but as we saw with the NAB survey this week conditions are still tough even if confidence in the future is showing a twinkle of light.

Perhaps it’s all about the Australian dollar.

As global growth looks likely to be picking up in 2014 the Aussie dollar, as the global FX growth proxy, could be in for a lift.

Recently the Governor jawboned the Aussie lower, saying a fall in the Aussie dollar was “inevitable”. It was uncommon aggression which we have seen repeated again and again lately with the mantra that the Aussie dollar still remains “uncomfortably high” even though it has fallen more than 6 cents from the recent break near 98 cents.

So why this uncommon aggression from the RBA and its Governor and the outlook for growth?

On the 30th anniversary of the Australian dollar’s float it is worth remembering that the great benefit of a floating currency is that it is a natural stabiliser to growth, rising to slow growth a little and falling to increase growth a little or a lot as necessary. The Aussie dollar has always performed that task well – but its not doing it anymore.

And it seems Governor Stevens faith in the Aussie performing its usual job of stabilising the economy has been shaken by recent comments from investors such as Blackstone co-founder Stephen Schwarzman who said recently: “We are very focused on Australia. Where else in the world can you invest in where they don’t have recessions?”

It’s impossible to know if Schwarzman had his tongue in his cheek when he made this comment but it is clear that Governor Stevens does not want to take the risk he was not. Because the problem is that if offshore investors truly believe that Australia is a recession-proof zone in a world of global uncertainty, and if the global economy picks up as widely expected next year the Aussie dollar is likely to come under upward pressure, as money flows to the United States and other destinations.

Instead the Aussie might rally in line with an uptick in global growth next year.

Stevens, on the other hand, is hoping for downward pressure to rebalance the domestic economy.

So perhaps the Governor’s new found bearishness on the economy is really a pragmatic attempt to help knock the Aussie lower and manufacture the lowest possible starting point for any rally the Aussie might have in 2014.

And it’s working so far. The Aussie has been unable to rally on strong jobs data and rests just above 90c against the US dollar. It’s at a 5-year low against the New Zealand dollar and at a two-and-a-half-year low against the Euro.

In the end the RBA is right that Australia needs a lower dollar to help even out growth across the nation as the mining investment boom transitions toward more balanced growth. Governor Stevens is uncommonly bearish but he’s on the money if its the Aussie dollar he is taking aim at.

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