Me on Sky News December 5, 2012
11minutes, play or CLICK THEN CLICK AGAIN to download mp3
Deputy Governor Lowe's excellent speech - recommended
The Reserve Bank has spoken of an extended period of low interest rates as official figures showed collapsing export prices have knocked the stuffing out of economic growth, cutting growth per person to zero and casting fresh doubt on the promise of a budget surplus.
The Australian economy grew at an annual rate of 3.1 per cent in the year to September, down from 4.3 per cent in the year to March. The quarterly growth rate was 0.5 per cent, no higher than population growth, meaning economic growth per per person fell to zero.
“What we’ve seen in this quarter has been a pretty savage reduction in our terms of trade,” said Treasurer Wayne Swan. “Revenue will be weaker. Profits are down and that will have a flow-through effect, but we can’t just look at just quarter: it’s a bit early to jump to a definitive conclusion.”
Australia’s top business economists are now forecasting a budget deficit of $8billion this financial year rather than the promised $1.1 billion surplus. “We think of this as a political downside rather than an economic downside,” said Stephen Halmarick, who chairs the executive committee of the Australian Business Economists.
“It will not be a significant issue to financial markets if a surplus is not delivered by June 2013, so long as there’s a medium term plan in place.”
The committee encompasses 16 leading economists who work for firms including the Macquarie Group, Deutsche Bank, JP Morgan and the Westpac, Commonwealth, National Australia and ANZ banks. Its forecasts have economic growth sliding to 2.8 per cent next year and growth in business investment sliding from 16 per cent this year to 9.3 per cent next year and then close to zero in 2014.
“The committee believes the peak in the prices phase of the mining boom is over,” Mr Halmarick said. “The peak in the investment phase will follow soon. The export phase of the boom has much longer to run.”
Addressing the ABE’s forecasting conference Reserve Bank deputy governor Philip Lowe said low inflation and low interest rates were the new normal.
“Most consumers and businesses now view it as usual, typical or expected that inflation will average two-point-something over time,” he said.
“For most of the past 20 years we were benefiting from either the credit boom or the terms of trade boom. Under the influence of these two factors one might expect, all else constant, higher average lending rates than otherwise.”
The unwinding of the credit and trade booms would mean low interest rates for a longer period of time than Australians had been used to...
“It is possible that normal lending rates will be somewhat lower for a period owing to the combination of global factors and the legacy of the credit boom,” Dr Lowe said.
“Whether or not this turns out to be the case depends upon a whole range of factors, including how cost and price pressures in the economy evolve.”
The prices measure used in the national accounts climbed a tame 2.3 per cent despite the introduction of the carbon tax in July. Household purchases of electricity and gas dived an extraordinary 3.2 per cent in the quarter, suggesting the carbon tax is having the desired effect.
Cutbacks in state and Commonwealth spending weighed heavily on economic growth, taking 0.5 percentage points off what would have been quarterly economic growth of 1 per cent.
In today's Sydney Morning Herald and Age
. Less than brilliant. How the ABE sees the year ahead
. Stimulus sugar-hit over, we're feeling weak
. Reserve: If we have to, we'll cut again