Wednesday, May 20, 2009

"It is real" - recovery looms

So say our mandarins

China's economic recovery is "real" and could bring about an Australian recovery within months - far sooner than predicted in the Budget, according to Reserve Bank Governor Glenn Stevens.

In the strongest sign yet that officials believe the economic tide is turning Governor Stevens told a post-Budget business briefing that developments in China and at home were "consistent with the view that a recovery will get under way toward the end of the year," bringing forward the 2010-11 recovery forecast in last week's Budget.

His assessment came as Treasury Secretary Ken Henry went on the offensive over the Budget declaring that many of its critics lacked the "reading age" to understand it and would have preferred Australia go into recession rather than run up the deficit needed to fight it.

Mr Stevens said he did not doubt that there had been "a genuine pickup in economic activity in China - quite a significant one" over the past four or five months.

Reserve Bank calculations of China's unpublished quarterly growth numbers indicate that "the pace of growth has picked up and the March quarter is the best quarter for about 3 quarters".

"It is real," the Governor told the business audience...

"The durability is the open question, and we don't really know the answer at this point".

Going beyond the findings about China in the Reserve Bank's board minutes also released yesterday, Governor Stevens said the upturn appeared to be "generated more or less entirely by domestic factors in China - not by a pickup in China's exports to the rest of the world".

It would mean investment in the sort of domestic infrastructure likely to push up demand for Australian exports and Australia's terms of trade.

Data released in Bejing after the Governor spoke lent weight to his assessment. Chinese retail sales rose 14.8 per cent in the year to April and industrial production 7.3 per cent. Urban fixed asset investment, including spending on roads and power plants, soared at an annual rate of 30.5 per cent buoyed by China's domestic stimulus program and a banking sector that lent more than the government-specified target.

Mr Stevens said there was a chance Australia could recover far more quickly from recession than either the Bank and the Treasury expected because many Australian businesses had merely put their expansion plans on hold rather than axing them in order "to see how things turn out".

"If there were some factor that somehow reduced that uncertainty materially - and what would that be is the question - but if that happened, it is plausible you could see a significant resumption of a lot of those expansion plans," he said.

The Treasury Secretary told a separate post-Budget function that while the proceeds of the late 1980s boom had been largely squandered on commercial office property, the proceeds of the latest boom had been invested more productively, often in the mining sector.

"These investments have added materially to productive capacity, allowing output to accommodate the demand from China for our resources, positioning the economy to take immediate advantage of the global recovery when it starts," he said.

Critics of the Budget's growth projections should be aware, "in case there is any doubt," that they came from the Treasury and not its political masters. "They are also the government's numbers of course," Dr Henry added, noting that his previous political masters had not always adopted Treasury projections as their own.

Signaling the approach he is likely to take at the upcoming Senate Estimates Hearing Dr Henry's said the Treasury's projection of above-trend growth of 4.5 per cent in 2011-12 had not been "simply plucked out of the air" but had been the result of a rigorous process in which the Treasury brought married short-term and medium term projections with the conservative assumptions in the long-term intergenerational report.

"Call us fastidious if you like, but we don’t like discontinuities in our economic projections. We wanted to be sure that we were describing a medium term scenario that is consistent with long-term conservative assumptions."

"In just about every meeting, senior ministers had three sets of tables and charts in front of them recording the impact of their decisions in each of those three timeframes. These were not mere props. They framed the decision making," he said.

Critics who doubted whether the Budget would return to surplus by 2015-16 should note that the spending restraint needed was far from unprecedented, although they could be forgiven for thinking so if they had "no experience to go on apart from the last half dozen years".

During the final years of the Coalition government spending soared by a 25.7 per cent in real terms, a rate unmatched by any other in the historical tables with the exception of the Whitlam and Fraser governments of the 1970s.

"In similar circumstances in the past – that is, circumstances in which the economy was emerging from recession with a sizeable budget deficit – Australian governments have managed to exercise the sort of discipline that the present Government has embraced," he said.

"Perhaps it is too early to be declaring that we will come out of this period of global economic crisis in much better shape than most other developed countries. But I’m prepared to make that prediction."

The complexity of the Budget appeared to have "exceeded the reading age of many".

Dr Henry said some its critics might have preferred the government to wait "for the recession to hit our shores before tackling it".

"Then they wouldn't have had anything like last week’s document to confuse them. Things would have been simpler."