Friday, February 23, 2007

Saturday Forum: Australia is not a two-speed economy

Everyone knows that Australia is a two-speed economy. In top gear is Western Australia along with Queensland and the Northern Territory.

On the slow setting is the rest of the country (apart from the high-flying ACT, which is a special case).

But what if everyone is wrong?

That’s the suspicion of the man whose view probably matters more than anyone else’s. You have probably never heard of him.

Glenn Stevens is a 49-year old amateur pilot from McMansion-infested suburb of Sylvania Waters by the Georges River in southern Sydney. Appearing before a parliamentary committee this week he took time out to stress that his own house was more typically Australian - “a piece of spec rubbish built in the1970s”. He’s also the Governor of the Reserve Bank...

Appointed in September after a decade of sitting alongside Governor Ian Macfarlane in parliamentary hearings, first as his assistant and then as his deputy, on Wednesday Stevens got the microphone to himself.

He said when people look at earning and spending in the mining-fuelled Western Australian economy and compare it to earning and spending everywhere else the differences appear stark. But the differences in production and employment were nowhere near as great. That’s because money earned and spent in the west is making its way east.

“Are there spillovers? Absolutely. They are through higher incomes for shareholders and employees that feeds into demand and spreads around the country. Some of that higher income of course is owned by foreign investors... but a good deal of it stays at home for shareholders and workers here, and governments get some as well,” he said.

Governor Stevens had prepared for the parliamentary committee a graph going back to the 1970s charting the economic performance of whatever was Australia’s best performing state at the time along with whatever was doing the worst. Even a quick look at it shows that the gap between Australia’s states has been narrowing over time, not widening.

On jobs, where NSW is commonly believed to be Australia’s basket-case and Western Australia our nirvana, the gap has almost closed.

Statistics compiled for the Governor show that during the year to January employment grew by 2.1 per cent in NSW and 2.4 per cent in Victoria. In the supposed boom state of Western Australia it grew by a broadly similar 2.2 per cent.

(Only in Queensland was jobs growth still racing ahead, at 5.4 per cent. The ACT figure - not in the information compiled by the Bank - is 4 per cent.)

At times in his first solo appearance before the parliamentary committee on Wednesday the Governor appeared to show frustration with its insistence that there were two quite different Australias.

Told by the Committee Chair, Liberal Bruce Baird that “some economists believe that Western Australia’s economy is growing faster than China’s while New South Wales is in recession” he replied with a tutorial in statistics.

He said it was true that New South Wales was growing below average at the moment. “That is not at all surprising. In the current circumstances it will not be Western Australia or Queensland that grow below average; they will be above average, helping to pull the average up.”

This did not mean that NSW and the rest of southeastern Australia were not sharing in the benefits of Australia’s minerals-fuelled prosperity. The connectedness of Australia meant that the rising tide in the west and north was lifting all of Australia’s boats. NSW, the ACT, Victoria, South Australia and Tasmania were better off with the minerals boom than without it.

The NSW rate of unemployment, admittedly the highest in the country, was just 5 per cent - a rate once thought unattainably low. And employment was growing in that so-called basket state, which made it unlikely that it was in recession.

Australia was enjoying a boom in minerals prices not seen in most Australian’s lifetimes. It was completely unsurprising that it should benefit Australia’s mining states first. “The terms of trade for Australia are at the highest level since the early 1950s. That is not an event that comes along very often. That does have a very big effect on Western Australia,” the Governor said. But the benefits were fanning out.

He might have added that the ACT is particularly big recipient of recycled mining income. The boom in mining in Australia’s west and north is feeding through into record and rising company profits that are pushing the Commonwealth’s tax take up to new highs. Much of this money gets spent on extra government programs (and many more of them will be set up in this election year) and many of them get administered in the ACT.

Right now the boom in the ACT appears to be putting especial pressure on ACT rents, but Governor Stevens was keen to point out that here as well the differences between Australias states are no where near as wide as is believed. After soaring more quickly than the rest of Australia, house prices in Perth are easing off, and the rental market is in bad shape nationwide.

“Rental vacancy rates are low right around the country; no particular region stands out all that much. It is quite common. But let us think back to what the fundamental economics are here,” Stevens said.

“The fact is that because of the much higher price level for housing around the country the rental yield, which is the actual running yield as a return to the investor for holding that investment, is quite low. In the period when the investor was getting a return from price appreciation he was getting some of the return that way. But it is hardly sustainable for a major asset market to continually give you most of your return through capital appreciation.”

The Governor said that rental yields would have to rise.

“That could happen by the rents going up; it could happen by the prices coming down… One way or another that higher rental yield will need to be re-established and that will alleviate this excess demand situation.”

Governor Stevens is an optimist. He believes that, left to themselves most financial markets sort themselves out even if there are “a few bumps on the road” along the way. He lamented on Wednesday that to the media “everything is a crisis”. But not to him.

Even big promises of extra government spending in the coming election won’t worry him much. He told the committee that most of this year’s election promises would “sound like a lot of money over five years, but in any one year - and in particular in the year or two ahead, which is when we are trying to have our influence - the effects may not be as big”.

As well: “We do not know which of these proposals will actually be implemented. We cannot know that this side of polling day. All I would say is that I think it is generally accepted on both sides that we need to keep the public finances in good, long-run shape. By and large, we have done that for quite a long time now, stretching back many years. It is a truism to say that clearly that needs to continue, but I think everybody knows that, don’t they?”

Mid-last year Stevens was invited to Melbourne to speak on “risk and the macro economy”. He took off in a light plane from Sydney’s Bankstown Airport and flew himself, taking an instructor along for instrument training.

As a recreational pilot he has seen more of Australia than most, and he knows how inconnected it is. The new Governor gaves the impression this week that he was not too concerned by risk, and he knews how to handle it.