RBA governor Glenn Stevens says economy on track – three reasons he wants us to be cheerful

It’s the second time in six weeks Reserve Bank governor Glenn Stevens has stood before the Australian public and told us to be more upbeat about the economy.

Amid all the reports of a possible crash in housing prices and a break-up in Europe causing financial catastrophe, Stevens said in a speech yesterday the economy is still performing extremely well, and that overall, the country’s performance has been “remarkably good”

“It is slowly becoming better recognised that the Australian economy’s relative performance against a very turbulent international background has been remarkably good,” he said, addressing an audience of economists.

Of course, this all means one thing – there probably aren’t any more interest rate cuts coming for a while.

But on the other hand, it’s a good sign Stevens is coming out in full support of the current state of the economy.

So why should you be so upbeat about the country’s finances, according to Stevens? Here are his three main reasons why:

1. Chinese production is still strong

One of the current fears surrounding economic uncertainty is the slowdown in Chinese manufacturing production, bolstered by industry surveys which show the industry slowing down.

But Stevens says these surveys put manufacturing still well above contraction – even growing as much as 10% a year.

“So far, this is a normal cyclical slowing, not a sudden slump of the kind that occurred in late 2008,” he said, adding it could be expected the Chinese would introduce stimulus if such a collapse ever occurred.

2. Housing prices are most affordable in 10 years

Far from a housing affordability crisis, Stevens says reductions in property values have caused homes to reach their most affordable in 10 years.

“The ingredients we would look for as signalling an imminent (property) crash seem, if anything, less in evidence now than five years ago,” he said.

“Four or five years ago we supposedly had a housing affordability crisis. Now it seems the problem some people fear is of housing becoming even more affordable.”

While the situation isn’t so great for investors, and a crash can never be ruled out, Stevens says this situation seems unlikely.

Stevens also says the banks have shown they would be able to withstand such a blow.

3. Possibility of financial crisis has diminished

The possibility of a downturn in Europe still remains, especially as debt deals in Greece and Spain are ongoing. But Stevens says although there is a risk financial markets could be impacted, Australia is well insulated.

“The vulnerability to this possibility is less than it was four years ago; our capacity to respond is undiminished,” he said, adding the RBA could provide liquidity for domestic markets.

Stevens also noted the RBA has enough room to cut interest rates if economic conditions deteriorate.

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