Economic Pulse: Three take-outs from the Glenn Stevens speech that sent the dollar tumbling

At 1pm yesterday, RBA governor Glenn Stevens’ office released a speech he was giving at a lunch in Sydney about how Australia would adjust to the end of the mining and credit booms.

By 1.05pm, the dollar, stable for the most of the day, had slipped 1.19% to US90.93 cents.

Why did the market react? We read the speech, so you wouldn’t have to:

“Accommodating” monetary policy is “appropriate”

It was this comment that most likely led to the Aussie dollar falling. Inflation rose 0.4% in June, putting the annual rate to 2.4%. The overall rate is well within the RBA’s target band, but 0.4% in just one month is a little more than what you would want.

High inflation typically leads to higher interest rates as the central bank moves to dampen the economy, but Stevens said the inflation data hadn’t changed the RBA’s recent tendency to lower interest rates.

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

Two booms are ending at once

We hear a lot about the end of the mining boom. But it was preceded by another, equally important boom that only ended recently, Stevens said.

The title of the talk, ‘Economic Policy after the Booms’, was quite deliberate, Stevens said. “There were two booms. Before the mining boom, or at least before its full flowering… there was an earlier boom. It was global, but Australians took part in it.”

Stevens is referring to the credit boom, which let households borrow significant amounts to buy assets that rose in value, leading to unusually strong consumption.

This boom has ended around the world, and though its end in Australia wasn’t as painful as it was elsewhere, it’s still ended.

“The behaviour of households has changed in a very important way,” Stevens said. “Real consumption per person had risen faster than real income per person for 30 years, from the mid-1970s until about 2005. That changed some years ago now, and after a noticeable fall in consumption in late 2008 and early 2009, spending and income have grown roughly on parallel tracks.

“People’s sense of wealth has not been rising at anything like the pace that it had been up until the financial crisis… The slowdown in asset values has been associated with a lift in saving and a slower path for consumption, which has had important implications for the economy.”

Business confidence is key

To survive the end of the two booms, other sectors of the economy need to pick up the slack, Stevens said. He doesn’t think this should necessarily be done by households, who, as he said, were facing the end of the days of easy credit.

That leaves the logical source of demand being businesses outside the resource sector.

Unfortunately, business confidence is in the pits, and this makes them picking up the slack unlikely.

This is understandable, Stevens said.

“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.”

But it’ll make it harder for Australian growth to keep up post-boom.


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