Reserve Bank governor Glenn Stevens has sounded a warning on Australia’s economic growth and vented his frustrations at the federal government’s reliance on the RBA’s monetary policy to effect change alone.
His comments potentially pave the way for another interest rate cut after the RBA chose to keep interest rates on hold earlier this month.
Speaking at the Economic Society of Australia Luncheon in Brisbane yesterday, Stevens said results over the past four quarters indicate economic growth is “below trend”.
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“In Australia, recent growth in the economy has not been as strong as we want,” Stevens said.
“The economy could do with some more demand growth over the next couple of years.”
While Stevens said export volume growth had contributed strongly to overall economic growth, he conceded domestic demand had increased by “a weak result” of less than 1%.
And while housing construction had risen strongly across the four quarters and consumer spending over the year had risen by more than real household income, Stevens warned both results owed “a good deal to low interest rates and rising asset values”.
“The bigger point is that monetary policy alone can’t deliver everything we need and expecting too much from it can lead, in time, to much bigger problems,” said Stevens.
“It really is very important that other policies coalesce around a narrative for growth,” the governor continued, suggesting infrastructure spending could play a key role in sustaining growth.
“In this regard, I think the government is on the right track in not seeking to compensate for lower revenue growth by cutting spending further in the short run. Of course, some resolution of long-run budget trends is still going to be needed to sustain confidence and that will not be an easy conversation.”
Paul Bloxham, chief economist at HSBC, told SmartCompany the comments, which Stevens has touched on in the past, show monetary policy has reached the point where it can only be so useful.
“The governor is saying there’s only so much monetary policy can do,” says Bloxham.
“We already have a cash rate at historically low levels and it’s doing what you’d expect – the housing market is picking up, housing construction is picking up and even retail spending to some extent is picking up,” he continues.
“But low interest rates alone can’t improve growth, we need other arms of policy to work.”
Bloxham says a focus on infrastructure spending and tax reform can pick up the economic slack from where monetary policy has been pulling all the weight for some time.
Meanwhile, Stevens also weighed into the property bubble debate, labelling the Sydney housing market “crazy” when asked about recent price growth during a Q&A session following his speech.
“I’m very concerned about Sydney and I think some of what’s happening is crazy, but we’ve got a national focus as well and that just increases the complexity,” said Stevens, according to the ABC.
“On whether or not that stays any hands [on interest rates], I have no comment.”
Bloxham says the governor’s comments made clear the problem was not a national issue, but rather a problem confined to the Sydney property market.
“We think the Sydney market is experiencing a worrisome exuberance at the moment,” he says.
“Although we don’t have a national house price bubble, because there is not a lot going on in other markets, Sydney is picking up in a way that is unsustainable.”
The comments come amid a continuing debate on Sydney and Melbourne house prices, after Treasurer Hoe Hockey made controversial remarks about first home buyers needing “a good job that pays good money” in order to afford the rising cost of properties in Sydney.