Tuesday, November 30, 2010

Flat growth but better than ever?

Governor Stevens' full speech below

Reserve Bank governor Glenn Stevens has talked up the economy ahead of new figures due tomorrow increasingly expected to show economic growth has stalled.

Much weaker than expected company profit and sales figures released Monday saw analysts slash their forecasts for growth in gross domestic product to close to zero, with some countenancing the possibility of a negative number, the first since the financial crisis.

"All the stars are aligning for a very weak third quarter result,” said JP Morgan economist Ben Jarman. "It's not out of the question now that we see negative growth."

The profits of non mining companies slid 3.25 per cent in the September quarter while the profits of mining companies grew a further 1.5 per cent on top a 58 per cent rise in the June quarter.

Mining now accounts for 4 in each 10 dollars of profit earned in Australia with total mining profits in the quarter topping $25 billion, accumulating at the rate of $282 million per day...

Sales were weak in the quarter with the volume of goods sold down 1 per cent as consumers turned cautious in the face of interest rate rises.

"The economy is fundamentally strong," said Treasurer Wayne Swan. "But in a volatile global environment it is to be expected that we are going to see bumps in the road for our domestic economy."

Governor Stevens told the Committee for the Economic Development of Australia in Melbourne the mining boom had dramatically boosted Australia's standard of living.

"To put it in very oversimplified terms, five years ago a ship load of iron ore was worth about the same as about 2200 flat-screen television sets," he said. "Today it is worth about 22,000 flat-screen TV sets – partly due to TV prices falling but more due to the price of iron ore rising by a factor of six."

"This is of course a trivialised example – we do not want to use the proceeds of exports entirely to purchase TV sets," he told CEDA. "But the general point is that all other things equal a high terms of trade will raise living standards."

"Let me offer one back-of-the-envelope calculation. The export sector is about one-fifth of the economy. The terms of trade are at present about 80 per cent higher than the long-term trend. This means 12 to 15 per cent of GDP in additional income is available to producers and consumers each year compared with what would have occurred under the trend. That will continue each year while the terms of trade remain at this level."

Mr Stevens said as mining expanded, other parts of the economy and some regions would suffer, at least in relative terms.

"Realistically, we won't be able to hold the economic structure static," he said. "Nor should we try. Had we had that approach through our history, we would still be trying to employ 25 per cent of our labour in agriculture and still be trying to ride on the sheep's back."

The Reserve Bank had no idea how long Australia's high income would last but it would be wise to use it to boost saving rather than spending.

"Consumption deferred can easily be enjoyed in future; consumption we get used to today is harder to wind back in the future if circumstances change," the Governor said.

Published in today's SMH and Age

The Challenge of Prosperity - 29 November 2010

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