Monday, July 29, 2013

Manufacturing will bounce back?

So says the Grattan Institute...

In the wake of major job losses at car manufacturers and as the Rudd government tries to bed down a politically difficult series of budget cuts there is glimmer of good news on economic front with new report suggesting manufacturing will bounce back from the mining investment boom back stronger than ever.

The Grattan Institute report says that far from being “permanently damaged,” the exchange-rate sensitive industries of manufacturing, tourism, education and agriculture “survived the boom in reasonable shape”.

It comes as the government prepares to reveal a downgrade in its economic forecasts along with a fresh round of budget cuts perhaps as soon as this week and as the Reserve Bank prepares to meet next week to consider cutting interest rates once again.

Already at a half century low of 2.75 per cent, a further cut would take the Reserve Bank’s cash rate to the lowest level since the 1950s, well below the so called “emergency low” of 3 per cent that prevailed during the global financial crisis.

Around 400 Holden workers took voluntary redundancy on Friday. The remaining 1700 workers at the Adelaide car assembly plant are considering a management proposal for reduced pay and conditions in order to keep the plant open.

Entitled The mining boom: impacts and prospects the Grattan Institute report concedes Australia runs the risk of a recession as the resource investment boom fades. But it says “recession is far from inevitable”, in part because Australia has avoided the high inflation that accompanied previous booms...

Figures released in the past week show that excluding the effect of the carbon price Australia's annual inflation rate is less than 2 per cent, easily low enough to allow the Reserve Bank to cut rates further.

The Grattan report says that rather than killing manufacturing, the mining boom “temporarily accelerated” its long-term decline as a share of gross domestic product.

Manufacturing has been sliding as a share of GDP since the 1970s.

An survey of exchange rate hikes in 16 countries similar to Australia shows manufacturing grew particularly rapidly after the exchange rate came back down. “Within three years, manufacturing exports as a share of GDP had risen by more than a third on average,” the report finds.

“Therefore temporarily high exchange rates in economies comparable to Australia have not had long-lasting effects on export volumes and the added value of manufacturing, the report concludes. “Manufacturing exports usually bounce back rapidly and reach trend within a few years.”

Australian Manufacturing Workers Union president Andrew Dettmer said he would “have to believe in the tooth fairy” to think that “once an industry has been devastated suddenly a few economic indicators return and therefore it will somehow return to production”.

Ford was leaving Australia and Holden was considering its future. “The international thinking is that once manufacturing dips 5 per cent of the total economy it is fundamentally lost,” he said.

Manufacturing constitutes around 8 per cent of the economy.

The Grattan report finds neither the Howard nor the Rudd and Gillard governments saved enough of the proceeds of the boom. “Tax decreases and spending increases have been larger than Australia can afford in the long run,” it says. “ Some spending was justified by the response to the global financial crisis and some has been invested, but underlying budget deficits now need to be repaired in more difficult times.”

Australian Industry Group Chief Executive Innes Willox said there were reasons for optimism.

“The currency has come off about 15 per cent since April. If it is held down or falls further those companies that have been able to stay afloat will be very globally competitive,” he said.

In The Sydney Morning Herald and The Age

Related Posts

. March. What the Reserve really thinks. The Aussie is 5 cents overvalued

. Don't blame the dollar manufacturers, you were sinking anyway - tough love from Gary Banks

. Construction after the boom. Builders say it looks okay


Thursday, July 25, 2013

Inflation is too low. Stand by for a pre-election rate cut

A pre-election interest rate cut is just a “coin toss” away after startling new evidence showing inflation heading below the Reserve Bank’s target band.

The Bank board meets in twelve days on Tuesday August 6, at a time when the election campaign could be underway. Its Governor Glenn Stevens has made it clear in the past that election campaigns do not prevent him from adjusting rates as he thinks he should. “If it is clear something needs to be done I do not know what explanation we could offer the Australian public for not doing it regardless of when the election might be due” he said in 2007, shortly before lifting rates during the 2007 campaign.

The consumer price index climbed 2.4 per cent in the year to June. But the bulk of the increase - 1.4 per cent - took place in just one quarter, September 2012, as the carbon tax was introduced and the private health insurance rebate was made less generous.

In subsequent quarters inflation climbed by no more than 0.4 per cent per quarter, equivalent to an annualised rate of just 1.6 per cent - well below the Reserve Bank’s target band of 2 to 3 per cent.

Mr Stevens has already made it clear the Bank “looks through” the price consequences of the carbon tax in setting rates and it is understood to be also prepared to look through the consequence of the last year’s changes to the private health insurance rebate, meaning the inflation rate the Bank targets is now below the bottom of its band.

But an August rate cut is not a done deal. The Bank regards inflation as allowing rather than necessitating a cut. Since the board left the cash rate steady at a half-century low of 2.75 per cent in July most international and local economic indicators have weakened. The only significant exception is housing. On Wednesday China reported the slowest pace of manufacturing growth in 11 months. The weaker economic outlook, particularly the weaker Australian employment outlook, will encourage the Reserve Bank board to move in August...

A further cut of 0.25 points would take most standard variable mortgage rates below 6 per cent for the first time since the economic crisis, slicing a further $46 off the monthly cost of servicing a $300,000 mortgage.

“The decision is a coin toss,” said Commonwealth securities economist Savanth Sebastian. “We are pencilling in a rate cut.”

The data shows the first sign of price rises in the wake of the dramatic slide in the Australian dollar which began in May. Prices subject to international trade climbed 0.3 per cent in the June quarter after sliding 2.8 per cent over the previous six quarters. More encouragingly, the prices shielded from international trade climbed an unusually low 0.5 per cent. The Bank sees this as a sign that wage pressure is easing as job markets weaken.

Treasurer Chris Bowen described inflation as “well contained”. Shadow treasurer Joe Hockey said the figures as ‘‘good’’ but that the carbon tax still made people struggle with the cost of living.

The carbon price is set to fall from its present $24.15 a tonne to the European price, at present $6 a tonne, next July putting further downward pressure on inflation.

Mr Bowen is working on an economic statement expected next week and due before the election is called. It will include updated budget forecasts understood to have wiped $6 billion off government revenues over four years and will outline the cost of the Papua New Guinea asylum seeker deal and measures to fund it.

In The Canberra Times, The Sydney Morning Herald and The Age

Related Posts

. April. It is possible for inflation to fall too low, it has

. October. Price Shock: The carbon tax is doing even less than expected

. July. The good news we won't believe, inflation is extraordinarily low

Related Reading

. Colebatch - Inflation figures expose carbon scare campaign


Sunday, July 21, 2013

What's the difference between a carbon tax and an emissions trading scheme?

It's a serious question

If you are anything like the radio producer who phoned me Monday morning, you won't have a clue what Kevin Rudd just did.

“What's the difference between a carbon tax and an emissions trading scheme?” he asked. “Our presenter needs to know.”

It occurred to me that if neither of them knew the difference I had been doing my job very badly, along with all the other economics writers and also the politicians who thought up the scheme in the first place.

We have been doing it so badly that after a decade of talk about the schemes Tony Abbott thought he could get away with describing them as “a so-called market in the non-delivery of an invisible substance to no one" – a line he had apparently pinched from the UK Telegraph newspaper, demonstrating that dumbed-down descriptions travel further than information.

My defence is that I began writing about the schemes years ago. I set down in print what I knew at the time and then settled down to reporting on changes to them rather than standing back every now and then and explaining what they were.

Readers who didn't understand what I have written were apparently too embarrassed to ring up and ask. They're never embarrassed to ring up when they do understand and they disagree.

So here's the explanation I should have been including all along.

If we wanted to completely stop emissions of carbon dioxide and associated greenhouse gasses it would be simple (although suicidal – plants need carbon dioxide in order to create oxygen). We could simply ban them.

But in trying to slow climate change we are attempting something more subtle. We want to wind back the emissions by a specified amount each year...

We could do it by passing a law saying each existing emitter will have to wind back its emissions by, say, 1 per cent per year. It would get the job done, but it would be enormously expensive for some firms (who have no easy way of cutting their emissions) and very cheap for others (who could easily cut their emissions further). Industry would end up suffering far more than is needed to achieve a fairly modest goal.

Australia pioneered a less painful solution to this type of problem in the early 1980s. Blue fin tuna was at risk of being wiped out. But there was no need to completely ban fishing, just to wind back the number of kilograms caught. So the government handed out a limited number of “individual transferable catch quotas”. If anyone wanted to catch more than their quota they could buy a spare from someone who was happy to catch less and sell it at a profit. There were few complaints and blue fin tuna survived.

A few years later in the United States President George Bush Senior picked up the idea, signing into law a new act to fight acid rain which was caused by emissions of sulphur dioxide. He issued a limited number of annual permits for sulphur dioxide emissions, but each year fewer than the year before. Then he encouraged the Chicago Board of Trade to set up an exchange on which the permits could be traded.

Over a decade the price of permits for sulphur emissions climbed from $100 to $800 a ton. The polluters who could easily cut back found themselves with something valuable. Those that couldn’t found business increasingly expensive, but not so expensive as to force them out straight away.

Over that decade sulphur emissions halved throughout the United States. In some parts of the country acid rain fell 25 per cent. The annual saving in healthcare costs was said to top $20 billion.

That's the sort of scheme that Kevin Rudd is going to bring in one year early in mid 2014, one with a history of working. Until now the government has sold permits to whoever needed them for a fixed price (which makes them a tax). From next July it will issue a limited number of permits each year, and fewer in each successive year than the year before. Some will be auctioned, some will be given away, but the important thing is that they will be tradeable. Firms that can easily cut their emissions can clean up by selling their unwanted permits to firms that find it harder.

It's a better way of getting there, except that Rudd will also allow Australian polluters to use permits from the European scheme which are dirt cheap because of problems in the design of that scheme and the European financial crisis.

Eventually he'll have to wind back access to the European permits or hope the price improves if he wants to meet the Australian target. He is moving in the right direction, taking a detour through Europe.

In The Canberra Times, and Sun Herald 

Related Reading

. Emissions trading: A mixed record, with plenty of failures

. Yes, Virginia, there can be a free market in carbon

Related Posts

. Carbon tax, your questions answered

. Fighting pollution without using prices is like...

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Monday, July 15, 2013

"Mostly False" Fact-checking the Coaltion's carbon tax costing

Moving immediately to a floating carbon price would result in “a black hole of up to $15 billion in the budget”.

- Joe Hockey, shadow treasurer, Friday June 28, 2013, on Channel 7 Sunrise

Now at $24.15 a tonne, Australia’s carbon price was not set to plummet to the European price (currently $6 a tonne) until July 1 2015 - when Australia moved to a floating price linked to Europe’s emissions trading scheme.

Amid speculation that Labor might move earlier to the floating price, the shadow treasurer Joe Hockey said such a re-scheduling would leave the budget up to $15 billion worse off because the current fixed price would be replaced sooner by a substantially lower floating price.

“The fact that they say they are going to abolish it [the fixed price] means they are going to have a black hole of up to $15 billion in the Budget,” Hockey told Channel Seven’s Sunrise on June 28..

The figure came from the Coalition’s climate change spokesman Greg Hunt.

It’s a big number. Hunt put it this way in a press release issued on July 1 2013: “The change could have a $15 billion impact on the government’s revenue over the forward estimates based on the current EU price.”

“Forward estimates” is budget terminology for the current financial year plus the next three. So neither Hockey nor Hunt is suggesting up to $15 billion would be lost in one year. In this case, it would be lost over two years - the current financial year and 2014-15, because the fixed carbon price was never due to exist beyond July 1 2015 in any event.

Greg Hunt’s office says it arrived at the $15 billion black hole number using Table 3.2.7 of the Clean Energy Regulator’s budget statement...

The table shows the government expecting to receive $8.34 billion from the carbon tax this financial year (when the carbon price will be $24.1 a tonne) and $9.27 billion next financial year (when the carbon price is scheduled to reach a fixed $25.40 a tonne).

If, instead, the fixed price was scrapped early and replaced with a floating carbon price of, say, $6.50 a tonne, the government’s carbon price receipts would plummet by $6.1 billion this financial year and $6.9 billion the next, according to the Hunt office reckoning.

That’s a forecast cut of nearly $13 billion – not quite the $15 billion claimed by the Opposition but a substantial shortfall all the same.

But is the $13 billion number correct?

Not in terms of the impact on the budget, it’s not.

Those $8.34 billion and $9.27 billion taxation figures apply to gross income from the sale of carbon permits. The net income figures, listed on the same table three lines below as “total taxation revenue”, are much lower.

What’s the difference? Somewhere between 40 per cent and 50 per cent of the permits are given away for free. (Their value is indicated in brackets, right below the gross figure relied on by Hunt and Hockey). The gross figure is notional. A huge chunk of it will never be received.

And what won’t be received can’t be lost.

Table 7 of Budget Statement 5 outlines what the government expects to actually receive. Reproduced below, it is nominated in “cash” terms that feed into the commonly quoted measure of the budget surplus or deficit, rather than the accrual terms used in the document relied on by the Coalition.

It shows the government was expecting carbon permits to net it $6.26 billion this financial year and $6.39 billion the next.

Moving straight to the current European carbon price of $6 a tonne this year and the projected European price of $6.15 next year would cost the budget $4.7 billion this financial year and $4.8 billion the next - a total of $9.5 billion.

And it’s an upper estimate. The lower carbon price would cut costs for some of the businesses directly and indirectly paying the carbon tax, those that have been unable to pass it on. With lower costs should come higher profits, boosting the budget’s company tax takings.

Estimates by the Australian Industry Group suggest the government would rake in an extra $800 million a year as a result of moving earlier to the lower European carbon price, making the likely hit to budget from an immediate floating of the carbon price nearer to $8 billion.

If the government brings foward the floating carbon price to July next next year, as it now says it plans to, the cost to the budget would be around $4 billion.

Politifact ruling:

Joe Hockey says that moving quickly to a floating carbon price would mean a budget black hole of up to $15 billion. The hole would be likely to be nearer $8 billion if the change was immediate, and would be nearer $4 billion if it happened in one year's time.

It’s a big cost, but well short of $15 billion.

We rate the statement "Mostly False"

In Politifact, The Canberra Times, The Sydney Morning Herald and The Age


Joe Hockey transcript, Sunrise, June 28, 2013

Greg Hunt press release, July 1, 2013

Wendy Black, Greg Hunt’s office. Email exchange, July 9 and 10

Tony Ritchie, Joe Hockey’s office. Email exchange, July 10

2013-14 Commonwealth Budget, Statement 5, table 7

Clean Energy Regulator, 2013-14 Budget statement, tables 3.2.7 and 3.2.9

Frank Jotso, ANU. Phone interview and email exchange, July 9 and 10

John Connor, Climate Institute. Phone interview, July 10

Gemma Williams, Australian Industry Group. Email exchange, July 10

Related Posts

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Friday, July 12, 2013

Bringing Australia together. Rudd's new Accord?

Thirty years ago Labor switched leaders just before an election. Bob Hawke abandoned the rhetoric of class warfare and spoke instead of “bringing Australia together”. He romped home in a landslide.

Kevin Rudd has connected himself to Bob Hawke in an unbroken line. He told the press club Thursday it was Hawke and Keating that transitioned Australia from “the old closed post-war economy to the new internationalised economy that sets us up for the future.” It was Rudd that “did it again”, transitioning Australia through what Paul Keating recently and eloquently described as the valley of death of the 2008-09 great global recession”.

The line was unbroken in the press club speech because there was scarcely a mention of Howard or Gillard, or of the opposition leader Tony Abbott except to observe that he had turned down Rudd’s invitation to appear with him at the press club and to link him to the “slash and burn” policies of Campbell Newman in Queensland and David Cameron in the United Kingdom.

But whereas Hawke was vague about what he wanted achieve by bringing Australia together, Rudd was specific. He wants a pact with business and unions to lift productivity by 2 per cent per year, well above the long-term growth rate of 1.5 per cent per year.

Calculations by PricewaterhouseCoopers suggest a 2 per cent growth rate would boost gross domestic product by $48 billion by the end of the decade, lifting Commonwealth tax revenue by $12 billion and state revenue by $6 billion.

He was specific too about how he would do it, pinching Coalition policies for streamlined industrial agreements for greenfields sites and simplified environmental approvals for major projects...

Some of his less clearly articulated proposals were winks and nods to business. He wants “the future availability of competitively priced domestic gas supplies high on the agenda”. It looks like an endorsement of a plea by the Australian Industry Group for a proportion of newly-discovered east coast natural gas to be reserved for Australian customers rather than sold overseas. Cabinet will “continue to work through a range of policy matters” including moving earlier to a floating rather than fixed carbon price as also demanded by business.

There might also be something for Newstart recipients barely surviving on $35 per day as asked for by business, unions and the unemployed themselves.

Boosting productivity will require much more than this, and productivity is a hard thing to measure. But its a start, and not a bad goal around which to bring Australia together.

In The Sydney Morning Herald and The Age

Related Posts

. Gillard's gone. Now lets get rid of her economic narrative

. Who are you going to believe about the economy, Gillard or Rudd?

. What is productivity?


Monday, July 08, 2013

"There is nothing sexier than consent"

Canberra Rape Crisis Centre poster



Sunday, July 07, 2013

Who are you going to believe about the economy, Gillard or Rudd?

Sunday column

Who are you going to believe? Gillard Labor or Rudd Labor? Or something in between? The two are polar opposites.

A week or so ago Julia Gillard told us the economy was “growing, stable and strong”. Now her replacement Kevin Rudd says “the China resources boom is over - the time has come for us to adjust to the new challenges.”

And not minor ones. “This will have a dramatic effect on our terms of trade, a dramatic effect on living standards in the country, a dramatic effect also potentially on unemployment unless we have an effective counter-strategy,” he said two days after taking over.

His Treasurer Chris Bowen rammed home the point: “Since the budget we have seen the price of iron ore fall by around 15 per cent and the price of gold fall by around 21 per cent. Dealing with the decline in our terms of trade will require very careful management.”

Labor is the party best able to provide that management, says Bowen. When you’re sick, you need a doctor.

“Managing large transitions in the economy is what Labor governments do,” he told his first press conference as Treasurer. “It is what Hawke and Keating did in the 1980s and 1990s. It is what the Rudd government did, managing the transition through the global financial crisis and through to the other side more successfully than any other advanced major economy.”

Someone is telling porkies. It’s either Gillard in saying everything is just dandy, or Rudd in evoking a sense of crisis.

I reckon it’s Gillard. Here’s why. Her address to the Committee for the Economic Development of Australia had another theme, along the lines of ‘loose lips sink ships’.

“The biggest mistake we could make would be to talk ourselves into unnecessary economic weakness” she said, laying into economists who spoke of the possibility of a recession. Low expectations could “themselves become an economic problem”.

But that couldn’t be true if the economy really was “growing, stable and strong”. Gillard’s argument contained within it it’s own refutation.

Rudd and Bowen are more believable.

Commodity prices are slipping. That’s a fact. Mining investment is falling away. The graphs show it. Something will have to replace resource investment as an economic driver. The Reserve Bank is doing what it can. It has cut interest rates seven times in eighteen months and succeeded in reigniting the housing market. But housing by itself won’t be enough. And China could stall. Officials there are trying to slow economic growth. If they succeed, smoothly, it’ll cause us few problems.

But the Financial Times columnist Martin Wolf and US economist David Levy argue that a smooth transition will be anything but straightforward...

The usual assumption is that “a rapidly expanding economy is like a speeding train, let up on the throttle and it slows down,” the say.

But China is more like a jumbo jet: “In recent years a couple of engines have not been working well, and the pilot is now loath to keep straining the remaining good engines. He is allowing the plane to slow down, but if it slows too much, it will fall below stall speed and drop out of the sky.”

In Australia Barclays economist Kieran Davies has run the numbers on what would happen here if China’s growth did temporarily stall.

China accounts for more than one third of Australia’s exports, more than any other developed country’s. Half of those exports are one commodity - iron ore. Davies says a sudden temporary slide in China’s growth would cut Australia’s growth by 1.40 percentage points, enough to trigger a recession. The shock would be cushioned by a collapse in our exchange rate, a blowout in the budget deficit and moves by the Reserve Bank to cut its cash rate toward 1 per cent.

This is not Barclay’s central forecast, merely what it believes would happen if China’s growth stalls.

Even without that Australia will have to find something - anything - to take the place of mining investment as a driver as it winds down.

On Wednesday Reserve Bank governor Glenn Stevens his version of the “all-care, no-responsibility” disclaimer seen on the rides the Royal Easter Show.

No-one can pretend to be able to fine tune this ‘handover’, to guarantee that the non-resources sectors strengthen, on cue, by just the right amount,” he said.

And he repeated the point: “No-one can promise that – but we will do what can reasonably be done.”

Stevens is in tune with Rudd and Bowen. Gillard is so last month.

In The Canberra Times, The Sun Herald and The Age

Economic Conditions and Prospects

Glenn Stevens

Address to the Economic Society of Australia (Queensland) 2013 Business Luncheon
Brisbane - 3 July 2013

It is a great pleasure to be in Brisbane once again.

Yesterday the Board, at its monthly meeting, left the cash rate unchanged.

I don't propose to comment about yesterday's decision in particular, or to send any particular messages about the next decision.

Instead I want to step back to look at the broader picture. The economy grew at about its long-term average rate in 2012, but more of that growth was in the first half of the year than the second. According to the latest national accounts, growth in real GDP has been running at an annualised pace of about 2½ per cent over the past three quarters. Our guess is that sub-trend growth will continue in the near term. Consistent with that, the rate of unemployment has tended to increase. Employment is growing – the number of jobs in the economy is at a record high – but not quite as fast as the supply of labour.

Over the past five years, the economy has expanded by about 13 per cent. The corresponding figure for the United States is 3 per cent. For Japan, the Euro area, and the United Kingdom, the figures are negative.

Some of our Asian neighbours and trading partners have also done well, which has certainly helped us. Korea has recorded growth about the same as Australia's (13 per cent), Singapore more (about 18 per cent). And of course China's growth over this period has, despite frequent talk to the contrary, been rather stellar. Chinese GDP has risen by over 50 per cent since early 2008. China's growth over the past year or two has moderated, to be more like 7½ per cent, not the 10 per cent plus seen for some years. Most of the data we are seeing from China are consistent with that pace. This is what the Chinese authorities have been saying they want to achieve.

It's worth noting that while Australia has done relatively well, the economy's average growth rate over the period since the financial crisis erupted in earnest has been only about 2½ per cent. In the preceding decade it had averaged almost 3½ per cent. That was a period in which the rate of unemployment declined from about 7½ per cent to just over 4 per cent. In contrast, the unemployment rate today, while still quite low by longer-run historical standards, at about 5½ per cent, is higher than it was.

There are a couple of points to make here. The first is that Australia's economy was overheating by 2008. Capacity was stretched as the resources sector was in the first phase of its investment build-up while household consumption was still growing briskly and credit growth was still in double digits by the end of 2007. Inflation rose, peaking at about 5 per cent. This was substantially due to domestic pressures, not just international ones (though they were not helping). These were all clear signs that we were not going to be able to keep growing at a pace like that seen in the decade up to 2008. The Reserve Bank had made this point many times, though it was not very popular. While inflation did subsequently abate, this experience showed that if there was to be a very large rise in resources sector activity, other sectors could not continue as they had been doing.

The second observation is that similar declines in rates of growth have been observed in other countries – even the ones which have come through the financial crisis with relative success. Around our region, Korea, Taiwan, Singapore, Hong Kong, New Zealand and Malaysia, although navigating the crisis pretty well, have seen their growth rates decline by at least as much as Australia's. So Australia seems to be part of a broader pattern here. While we have benefitted a lot from China's ongoing emergence in this period, so have those countries.

The fact that no country has managed to return to the sorts of growth seen prior to the crisis is highly suggestive that that growth was to some extent being driven by forces that could not be sustained. Perhaps this has to be a conditioning factor when we think about our own growth aspirations and the way we seek to achieve them.

At this point, we have unemployment at about 5½ per cent, inflation ‘in the 2s’, the banking system is strong and government finances overall sound. Growth is on the slow side, inflation is low. That combination means that we have low interest rates (the lowest for fifty years in fact). Significant structural change is occurring, which is always challenging. But set in context, the macroeconomic data over recent years show a pretty respectable set of outcomes. Those who have memories of the 1970s or 1980s or the 1990s would surely recognise them as such.

Now it has been said that we were ‘lucky’ to have the mining boom, the effect of China and so on. Otherwise, we would have seen much more economic weakness. It's hard to disagree with that proposition as a piece of arithmetic. As a piece of analysis, though, it is incomplete.

It could equally be said that we were ‘lucky’ that the effects of the global economic downturn worked to help reduce inflation in Australia from its peak in 2008 of 5 per cent – which was way too high – to something acceptable. It could also be said that we were fortunate that the sub-prime crisis in the US emerged from early 2007, and not later. Although such lending was less prominent in Australia at that time, it was growing fast and would have become a much bigger vulnerability had it continued at that pace. The fact that things went wrong in the US when they did meant that what was a small problem here stayed small. It could be added that we were lucky that the change in behaviour of households – slower borrowing, more saving – came when it did. For a start, had households continued as they were, they would have become more financially extended, and it is obvious now that that would have been risky. Moreover, this changed behaviour of households has helped us absorb the resources investment boom.

Of course the story is not yet finished. We have to negotiate the downward phase of the investment boom over the next few years, which appears likely to pose significant challenges. How will we meet them?

A good way to begin is to have a reasonable starting point, and we have a better starting point going into this episode than we might have had, or than we have had on other occasions. Had we followed the pattern of previous terms of trade booms, we would have had much more inflation, faster credit growth and more asset price inflation, and more excesses generally. And then, when the terms of trade began to fall, we would have been much more likely to have a very big slump. This was the case in the early 1950s, the mid 70s and the late 70s (Graph 1). In each case domestic excesses arose resulting both from flow-ons from high commodity prices with a fixed exchange rate and policy weaknesses, which then made the ensuing downturn worse.

Graph 1: Inflation Cycles

It hasn't been that way this time. On this occasion, the resources boom – a bigger one than anything seen for at least a century – was accommodated without a big rise in inflation, or a big run-up in leverage or an unsustainable asset price boom. In fact, for most of the past several years we have had various industries or regions complaining that they had not felt the benefits of the boom. There were actually positive spillovers. But the excesses were not as great as had been the case on other occasions.

Quite evidently one major feature has been a flexible exchange rate, something Australia did not have in previous resources booms. The exchange rate played the role it is supposed to play when the country receives a large expansionary external shock: it rose. It has been correctly noted by other commentators that the real exchange rate has in recent times been at its highest since the float thirty years ago. Indeed, it has been just about as high as any time in the past century. In the broad that is not a total surprise, given that the terms of trade rise and ensuing increase in resources sector investment has been bigger than anything seen in a century (Graph 2).

Graph 2: Real Exchange Rate and Terms of Trade

Actually, the exchange rate might have been even higher but for the changes in behaviour by households, which have not returned to their earlier spending habits, instead maintaining a saving rate much more in line with longer-run historical norms. Corporations have tended to have a reasonably conservative mindset too, putting an emphasis on reducing debt and maintaining high levels of liquidity.

Had they not done that, all other things equal, we would have had lower national saving, a larger ex ante gap between saving and investment, and a larger current account deficit. Interest rates would have been higher and the exchange rate presumably even higher than it was. Some largely non-traded business areas – retailing or real estate or banking – might have enjoyed an even longer period of households gearing up and spending. I conjecture that some other trade-exposed sectors would have had an even harder time than they did have. Moreover, we would, I think, have been more exposed to the effects of the decline in the terms of trade that we are now seeing.

So the more ‘cautious’ or, more accurately, more prudent behaviour of households, together with some genuine caution by many firms, has been a force that has meant that Australia has accommodated a 100-year high in resource investment. Higher saving by the private sector has helped to ‘fund’ the resources investment boom at lower interest rates, and a lower exchange rate, than might have been the case otherwise. I am not convinced we should lament that performance as much as we seem to do.

That is not to deny that, for many areas of the economy, the exchange rate has been ‘too high’ given the level of costs and productivity in place. But realistically, it is the nature of the shock we experienced that certain high cost or low productivity parts of the economy would struggle with the implications of a big rise in the terms of trade.

In fact, I suspect that many sectors would still have struggled even if the exchange rate had not risen. At a 70c dollar, the resources companies would have had even higher expected profits and an even greater ability to bid for labour and capital. Inflation of wages and prices would have been higher, and in the scramble to keep up many of the same companies that have struggled in recent times would still have struggled. Admittedly, higher inflation might have concealed the problems to some extent, since everyone's nominal revenues would have risen faster, but only for a while. In the end, relative prices had shifted and, at any exchange rate, some sectors were going to find that to their advantage and others to their disadvantage. Moreover, taking the inflationary route would have left a much bigger legacy of problems to come home to roost as the resources boom matured.

That said, the exchange rate was somewhat too high for a period. It is no secret that I, for one, have been surprised that the foreign exchange market has taken as long as it has to reflect the fact that the terms of trade peaked some time ago – nearly two years ago, in fact. In the end, though, market-based exchange rates do eventually adjust – and usually in a less disruptive way than those that are maintained artificially. A flexible exchange rate is an important part of adjustment over all phases of the cycle and it remains a major advantage that we have one. If the economy ‘needs’ a lower exchange rate, it will probably get it.

So I would argue that, as we face the undoubted challenges of the decline in resources sector investment, our starting position is in several important respects a better one than we have usually had at this point of previous episodes of this kind.

Still, a starting point is just that. It is understandable, as we go into this phase, that people will ask ‘where will the growth come from?’ The conventional discussion at present has turned its attention to just this question. Not so long ago people were worried that there were no positive spillovers of the boom, or that there were even, in net terms, adverse effects. Some almost seemed to feel that it would have been better if there had never been a boom. Now suddenly people are worried that there were positive spillovers from the boom after all and that their absence or reversal will be disastrous.

The question of where will the growth come from is one that recurs periodically at moments of uncertainty. Twenty years ago there was an almost despairing pessimism about economic prospects in the wake of what was admittedly a pretty big recession. It was thought likely by many observers that unemployment, then in double digits, would remain so for a long time. In fact, as we now know, we were on the cusp of two decades of good economic performance, at the end of which our country's relative standing for economic management would have improved out of sight. Who predicted that?

Moreover, areas of the economy that we often don't think about have proven to be major drivers of – and participants in – that growth. Over the 21 years to mid 2012, real GDP rose by about 100 per cent. Only 3 percentage points of that 100 per cent came from manufacturing. The largest contributions came from financial services (13 percentage points), mining (10 percentage points), construction (9 percentage points), professional services (8 percentage points) and health care (7 percentage points). The number of jobs in the economy has increased by around 50 per cent over the same period, with around two-thirds of this increase attributable to household and business services of various kinds. Within these sectors, health care (around 9 percentage points) and professional services (around 7 percentage points) have made particularly notable contributions.

In other words, most of the time the answer to the question ‘where will the growth come from’ is that only part of it will come from the old traditional areas, and a fair bit of it will come from new things, often things of which we are only dimly aware. That is, in fact, the nature of a dynamic, evolving economy.

Turning to the current conjuncture, it can be observed, in conventional expenditure accounting terms, that some key areas are well placed to expand once they have the confidence to do so. Non-mining business investment, for example, as a share of GDP has been unusually weak – it is not much above its recession lows of the early 1990s. Many companies, rather than extending themselves, have been financially conservative over recent years and are sitting on very substantial sums of cash. It's hard to believe that this configuration will not change at some point over the next few years.

Likewise, dwelling investment has been low for an unusually long period, with at least some households intent on reducing debt, thereby strengthening balance sheets. Households have accumulated a good deal of cash as well over recent years. Meanwhile, population growth is quite solid and it has been picking up a bit of late. If anything, we will need to build more dwellings than we have been over recent years. Meanwhile, interest rates are low, dwellings are more ‘affordable’, and finance approvals for housing purchases have risen by 16 per cent over the past year. So there are ‘fundamentals’ that favour a pick-up in these sectors.

Of course, we have to add two things. The first is that no-one can pretend to be able to fine tune this ‘handover’, to guarantee that the non-resources sectors strengthen, on cue, by just the right amount. We have, in fact, had a few handovers over the past five years – from private demand to public in 2009, then to mining investment subsequently. Now we are looking back to household dwelling spending, non-mining investment (and exports). Previous handovers have occurred, largely successfully. That doesn't guarantee the next one will, though it does mean that we shouldn't assume that it won't occur.

The second thing to say is that much depends on ‘confidence’ – that intangible thing that is hard to measure and very hard to increase. We are talking here about confidence that the future will be characterised by growth, that there will be customers for products, that innovations are worth a try, and so on. That confidence seems pretty subdued right now.

To the extent that subdued animal spirits reflect global issues, which they must to some degree, there is not a great deal we can do about it beyond tending to our own national affairs as diligently as possible.

More generally, while there are various ways policy measures can damage confidence, there is no simple policy lever that can be quickly pulled to improve it. Rather, confidence-enhancing conduct of policy involves having well-established and understood frameworks, and acting consistently with those frameworks over time.

The Reserve Bank, for its part, has a well-established monetary policy framework. Guided by this, we will be able to continue to do our part, consistent with our mandate, to assist the transition in sources of demand that is needed. We cannot fine-tune it – no-one can promise that – but we will do what can reasonably be done.

The conduct of other policies likewise needs to be principled and consistent. Notwithstanding the difficulties of achieving a budget surplus in any particular year, which will always be hostage to what happens in the economy and the vagaries of forecasting, there remains a strong commitment to fiscal responsibility in Australia across both sides of politics, even if there are different views about how to achieve it. The importance of that commitment will, if anything, be heightened in the future, given that significant challenges exist over the medium term in funding government initiatives that the community appears to want.

Consistency in other areas that have a bearing on costs and productivity is also important. My assessment is that at the level of enterprises, efforts to improve productivity have been stepped up under the pressure of the high exchange rate and structural change. But we should still be asking whether there are things in the way of faster improvement. Is the combination of regulatory structures of various kinds – however well-meaning and valid in their own terms – imposing unnecessary and excessive costs of compliance, or creating undue complexity for business?

At a previous presentation in Queensland, when asked about this, I made reference to the Productivity Commission's ‘list’. The list is a substantial one. The good side of that is that there are many things that can be done to foster the improvement in living standards we all seek.

We have continued to live in interesting times. Major challenges have been faced, but significant ones lie ahead. No-one can pretend that things will be simple and easy. But, by the same token, prudent policies, within the right frameworks and coupled with private initiative responding to the right signals, can – if we are prepared to accept their requirements – provide Australians with reasons for confidence about the future.

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Saturday, July 06, 2013

2013-14 Economic Survey. Australia tipped to muddle through

Tim Colebach:

Australia's growth in 2013-14 will be slow, but it won't stop. The mining investment boom has probably peaked, but will decline only gradually. Unemployment will rise in coming months, but will stay below 6 per cent.

The key message from Australia's independent economists in Fairfax Media's half-yearly economic survey is that the economy is unlikely to meet official growth forecasts in 2013-14, or, for that matter, 2014-15. The baton change from mining investment to other drivers of growth will not be smooth.

But the consensus is that Australia will muddle its way through, without suffering too much damage. In 2013-14 the economy is forecast to grow by 2.35 per cent. That is appreciably less than Treasury's budget forecast of 2.75 per cent growth, but it roughly maintains the growth pace of recent months.

By 2014-15, most of the 27 economists surveyed expect the economy to be picking up speed, growing by 2.75 per cent. The budget has forecast 3 per cent growth, which has become the new trend growth rate since 2000.

If the population keeps growing at its current rate of 1.75 per cent, that implies that growth per head - the economy's real bottom line - will be just 0.6 per cent this year and a modest 1 per cent in 2014-15. That is well below its trend growth rate of 1.5 per cent.

The survey, bringing in economists from financial institutions, universities, consulting firms and industry groups, has done a remarkable job of forecasting recent economic trends. Two years ago, when the Reserve Bank forecast growth of 4.5 per cent in 2011-12, and Treasury tipped 4 per cent, our panel predicted it would be just 3.2 per cent - very close to the actual growth rate of 3.4 per cent.

A year ago, the budget forecast growth in 2012-13 to be 3.25 per cent, and the Reserve Bank forecast 3 to 3.5 per cent. Our panel predicted it would be just 2.9 per cent, and for the three quarters to March, that has been exactly on target.

This year's forecasts differ significantly from the budget forecasts in three areas:

■The panel is far less optimistic about export prices. While Treasury predicts that the terms of trade - the ratio of export prices to import prices - will largely hold its ground in the next 12 months, declining only 0.8 per cent, the panel predicts it will fall by 4.9 per cent, implying further pressure on Australia's high-cost mines.

■The budget assumed that the peak of the mining boom is still ahead, tipping business investment to rise a further 4.5 per cent in 2013-14, generating an extra $12.5 billion of output. Since then, the March-quarter national accounts have shown business investment peaked last September, making our panel far more pessimistic.

On average, the panel forecast business investment to decline by 0.6 per cent in 2013-14, cutting $1.5 billion off the nation's output. After a decade in which business investment grew on average by more than 10 per cent a year, that would be a dramatic change, especially in the resource states.

■Treasury's budget forecasts assumed that lower interest rates would reignite consumer spending, which it predicted would grow by 3 per cent in 2013-14. Again, recent data suggests the ''green shoots'' celebrated in January and February have withered since. The panel is less sanguine than the budget, on average tipping consumers to buy only 2.4 per cent more in 2013-14 than they did last year.

That implies another tough year for traditional stores, with online retailers and service providers already taking most of the growth in retail spending. It is also bad news for state governments, which rely heavily on the GST collected by retail stores to fund their services.

While many in our panel believe the Australian dollar needs to fall significantly further to restore the global competitiveness of non-mining industries such as manufacturing and tourism, few expect it to happen in 2013-14. On average, the panel expects the dollar to shuffle down to US91¢ by Christmas, and US89¢ by mid-2014.

They don't see the global economy as much help either. The panel expects China's growth in 2013 to slow to the 7.5 per cent set by the Chinese government as its minimum benchmark. The US economy would grow just 2 per cent, with global growth underperforming again at just 3.15 per cent.

But, as always, there is a wide diversity of views on the panel, as you can see from the individual forecasts spelt out below. While everyone has their individual insights, the forecasts and accompanying comments show three broad streams among our panel members.

The optimists share the view of Treasury and the Reserve Bank that economic growth will be close to trend this year, and accelerate into 2014-15, as mining exports gather pace, the lower dollar lifts trade-exposed industries, and lower interest rates stimulate a housing recovery and higher consumer spending.

Three market economists - BT's Chris Caton, Citi's Paul Brennan and TD Securities' Alvin Pontoh - predict that there will be no more rate cuts and the Reserve's next move will be to lift interest rates early next year. They expect growth to average 3 per cent over the next two years and unemployment to stay in the fives.

The middle ground of panellists expect one more rate cut this year, with the Reserve then likely to stay on hold. They, too, see the economy picking up speed in 2014, with a bit of help from the dollar.

The pessimists are not too pessimistic: they expect the Reserve to move fast to nip trouble in the bud, with two or three rate cuts by Christmas. Most believe that will see the economy return to trend growth by 2014-15.

Tim Toohey, of Goldman Sachs, Bill Evans, of Westpac, Su-Lin Ong, of RBC, and Greg Evans, of ACCI, tip two interest rate cuts by Christmas, while Macquarie's Richard Gibbs predicts three.

The market economist most worried about 2014-15 is Merrill Lynch's Saul Eslake. He warns that by then mining investment will start falling off the cliff - dragging growth down to 2 per cent and blowing out the federal budget.

In a category of their own are our resident pessimists, Jakob Madsen, of Monash University, and Steve Keen, recently retired from the University of Western Sydney. Keen is the only panel member to forecast a recession. He predicts output will slump 0.5 per cent this financial year, as China's growth slows to 6 per cent, causing commodity prices to crash and take the dollar with them. The dollar's fall would at least mean a rapid rebound in 2014-15.

Madsen picks growth to slow, to 1.5 per cent this financial year and just 1 per cent in 2014-15. He, too, sees China's growth slowing abruptly, but he also sees the Reserve Bank reversing course to raise rates in response to higher expectations of inflation and federal budget deficits.

Melbourne University's Neville Norman, our top forecaster in 2009-10 and 2010-11, sketches an unusual scenario: lowish growth this year (2.22 per cent), which then accelerates dramatically to 3.8 per cent in 2014-15, as China defies the sceptics, households replace ageing durables, and a new federal government lifts business confidence by tackling the deficit - among other things, by lifting the GST to 18 per cent.

Now that would be an interesting future.

In The Age and Sydney Morning Herald

Forecasters come up trumps but BT in lead

Don't say we didn't warn you. This time last year, our economic survey forecast that Australia would grow more slowly in 2012-13 than the government said.

The panel predicted that unemployment would rise to 5.5 per cent. It forecast that our terms of trade would plunge.

It forecast that the dollar would fall, but the sharemarket would rise. It forecast two of the Reserve Bank's three interest rate cuts.

It wasn't a bad set of forecasts, was it? A big pat on the back for our panel, who had a very good year.

The budget forecast growth in 2012-13 to be 3.25 per cent. Our panel was more conservative, going for 2.9 per cent. On figures published for the first three quarters, that was spot on.

Many of our forecasters were very close; it's too early to tell who wins gold.

The panel itself wins the gold medal for forecasting that unemployment would climb to 5.5 per cent by June and that underlying inflation would remain at 2.4 per cent despite the carbon tax.

Andrew Hanlan from Westpac, Burchell Wilson from ACCI and retired Treasury official Des Moore had the best crystal balls on interest rates, tipping three rate cuts in 2012-13.

One thing the panel got wrong was business investment. Most went with the budget forecast that the boom would steam on, with business investment rising 12.5 per cent. But two saw it ending: Andrew Boak of Goldman Sachs, who tipped year-average growth of just 6.9 per cent, and Master Builders Australia economist Peter Jones, who tipped 7.5 per cent. The Goldman Sachs team wins that gold medal, but Jones picks up another for his bullseye tip that housing investment would rise just 0.5 per cent. Just as well he works for the MBA.

The blowout in the budget from small surplus to big deficit took most of our market economists by surprise, but not Tom Kennedy of JPMorgan, who tipped a $15 billion deficit. But he was pipped by university economists Neville Norman (Melbourne) and Jakob Madsen (Monash) who split the gold, forecasting deficits of $18 billion and $20 billion, respectively.

The most stunning forecasting effort, however, came when BT economist and wit Chris Caton sat down to tip the markets.

Chris, we wish we could afford to pay you, but we trust you made a moolah by backing your own tips. From Fairfax Media, we award you our Palme d'Or as forecaster of the year.

In The Age and Sydney Morning Herald


Thursday, July 04, 2013

It's wrong to hire Treasury people?

1970s Treasury, National Archives. Creative Commons
But Hockey himself has hired Treasury people

Shadow Treasurer Joe Hockey has accused Kevin Rudd of politicising the Treasury, describing the Prime Minister’s recruitment of a senior official as “a joke” and “wrong on so many fronts”.

On Wednesday, Mr Rudd announced that Treasury deputy secretary Jim Murphy, would be his new chief of staff.

Mr Murphy is head of the Treasury’s markets group and is well regarded in business circles.

Mr Hockey, also claimed the head of the Treasury, Martin Parkinson, had called him to complain about Labor appointing “so many” public servants as political staffers.

It is understood this conversation happened some time ago.

“At one stage the Secretary of the Treasury rang me up and expressed… disappointment that he was in a position where he had so many Treasury public servants in political offices,” Mr Hockey said on Thursday morning.

“He was doing the right thing in letting me know”.

A spokesman for Mr Hockey confirmed the shadow treasurer was referring to Dr Parkinson, but he would not reveal when the call was made or any further details of the phone conversation.

Fairfax Media has contacted Dr Parkinson’s office for comment.

Mr Hockey told journalists that “it politicises the Treasury” when politicians such as Mr Rudd and former treasurer Wayne Swan, recruit Treasury public servants into their political offices.

“This is a joke,” Mr Hockey said...

“Jim Murphy is meant to run the markets division of the Treasury… He has been plucked out to go and run Kevin Rudd’s political office as the most senior official in that office. It’s just wrong.”

Mr Hockey’s complaints ignore a long history of movements between the Treasury and politicians’ offices on both sides of politics.

Arthur Sinodinos moved from Treasury to the office of Coalition leader John Howard in 1987, returning to the Treasury in 1989 when Mr Howard lost the post. He rejoined Mr Howard’s office when Mr Howard was reappointed opposition leader in 1995, staying with him as prime minister and becoming his chief of staff. Mr Sinodinos is now a Coalition Senator.

Treasury assistant secretary Peter Boxhall and colleague Peter Hendy joined Coalition leader Andrew Peacock’s office when he replaced Howard in 1987. Mr Boxhall later worked in the office of Coalition leader John Hewson and Treasurer Peter Costello before being appointed head of the Department of Finance. Senior Treasury official Phil Gaetjens was seconded to Mr Costello’s office to replace Mr Boxall. He returned to Treasury when the Howard government lost office in 2007 and is now head of the NSW Treasury.

Treasury assistant secretary Don Russell joined the office of Labor Treasurer Paul Keating in 1985, later becoming his chief of staff as Treasurer and Prime Minister and being appointed Ambassador to Washington and head of the Department of Innovation.

Ken Henry was seconded from Treasury to Mr Keating’s office in 1986. He returned in 1991 and worked closely with the Howard government on the implementation of the goods and services tax before being appointed head of the Treasury by Peter Costello in 2001.

Dr Parkinson himself worked in the offices of Labor Treasurers John Kerin and John Dawkins from 1991 before returning to the Treasury and being asked by John Howard to run the prime minister's emissions trading task group in 2006.

With Jonathan Swan, in The National Times

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Wednesday, July 03, 2013

Could Labor be preparing to blow out the budget deficit?

Update: Apparently not

Could Labor be preparing to blow out the budget deficit?

In his first full press conference as Treasurer on Tuesday Chris Bowen drew a line under the Gillard era.

Rather than being “strong” as claimed by the former prime minister, Australia’s economy faced headwinds that would require “very careful management”. Asked whether he would be prepared to let the deficit blow out further if needed he used an intriguing set of words:

“We stand by our fiscal strategy, which is to return to surplus over the economic cycle. Now of course, we do that in a responsible way, we do that in response to emerging challenges and difficulties. But our long term commitment has been to a surplus over the economic cycle.”

Which could mean that if needed Labor will let the deficit blow out. His more downbeat assessment of the economy may have even been preparing the way. After all, it was the Rudd government that managed “the transition through the global financial crisis and through to the other side more successfully than any other advanced major economy”.

Bowen said: “It is in that tradition that this Government will approach the economic times ahead”.

There are reasons to think it will need to push out the deficit...

Quickly abandoning the $24.15 a tonne price for carbon and moving to the European floating price (around $6.50 a tonne) would cost the budget $3 billion to $4 billion per year. Lifting the lagging Newstart unemployment benefit by $50 per week would cost $1 billion per year.

This year’s deficit is penciled in at $18 billion deficit. Adopting just two of the proposals Kevin Rudd’s has flagged would blow it out to $23 billion. It would also delay the return to a slight surplus, at the moment scheduled for 2015-16.

And there are reasons to think the government would be unwise to cut too hard or raise taxes too much in other areas to compensate.

On Monday July 1 the superannuation levy climbed from 9 per cent of most salaries to 9.25 per cent. That won’t affect the economy much now, but by next July the effects will be apparent in lower wage rises than would have otherwise happened as employers scramble for money to pay the levy. Also on July 1 next year the Medicare levy will climb from 1.5 per cent of most salaries to 2 per cent to fund the disability insurance scheme, further denting incomes. And on the same date the superannuation levy will climb another 0.25 percentage points to 9.5 per cent. From then on it will climb at double that pace - 0.50 percentage points per year, each year until the end of the decade.

Incomes are about to be squeezed. Only a brave or (more likely) a foolhardy government would squeeze them further while the economy faced headwinds.

Chris Bowen may be brave, but he is not coming across as foolhardy.

In The National Times

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Bowen draws a line under the Gillard/Swan era

Treasurer Chris Bowen has recast Labor’s economic message warning of an uncertain outlook that will require “careful management”.

A week after the former prime minister Julia Gillard insisted the economy was “growing, stable and strong” Mr Bowen said commodity prices were starting to slide and mining investment was turning down.

“Demand for resources is starting to moderate, partly due to China's economic transition and transformation that it are dealing with,” he told his first full press conference as Treasurer.

“Since the 2013-14 budget we have seen the price of iron ore fall by around 15 per cent and the price of gold fall by around 21 per cent,” he said.

“We are seeing a transition from the investment phase of the mining boom to the production phase. The investment and construction phases were very labour intensive, soaking up workers throughout the economy.”

“The production phase will be very different.”

“Managing the transition and dealing with the decline in our terms of trade will require very careful management in the coming months and years.”

The Reserve Bank was on standby to cut interest rates again if needed...

"The Reserve Bank still has considerable room to move if they feel the need in coming months,” he said. “If we see that the economy needs more support because global growth becomes less stable or other factors change, the Bank does have the capacity for further changes into the future.”

Mr Bowen made his remarks after the Reserve Bank left its cash rate on hold for the second consecutive month, confirming in a statement released after the meeting that the inflation outlook “may provide some scope for further easing should that be required”.

Asked whether he was reframing Labor’s economic message now that the leadership had changed he said he was “calling it as I see it”.

“I have been treasurer now for a few days

and as I see it, the Australian economy is resilient and the Australian economy has grown well, due in large part to this government’s strong economic management. But as I see it there is a transition to manage.”

“You will forgive me for saying it is this government that has the skills and experience to provide that economic management. The opposition has a different approach.”

Each of Mr Bowen’s references to strong growth were in the past tense, in contrast to former prime minister Gillard who told the Committee for the Economic Development of Australia last Monday the economy remained strong.

HSBC chief economist Paul Bloxham said Mr Bowen’s remarks represented a “distinct change of rhetoric” from the former treasurer Wayne Swan and former prime minister Julia Gillard.

“The Gillard/Swan combination stressed potential of the economy, the Rudd/Bowen combination is stressing the risks,” he said.

“Both approaches are appropriate, but the new team is choosing a different emphasis.”

Asked whether he thought the budget promise of a small surplus in 2015-16 was still achievable Mr Bowen said he stood by the budget forecasts.

However he said the economy had to be managed “prudently” which meant the budget had to be turned around “without embarking on the massive wholesale cuts to jobs and services which Mr Abbott advocates.”

“Managing large transitions is what Labor governments do,” he said. “It is what Hawke and Keating did in the 1980s and 1990s, it is what the Rudd government did in the global financial crisis more successfully than any other advanced economy.”

The new Labor leadership’s with business was good. Speaking after a meeting with Prime Minister Rudd the president of the Business Council Tony Shepherd said it had been an “opportunity to press the reset button”.

In The Sydney Morning Herald and The Age

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Monday, July 01, 2013

Gillard's gone. Now lets get rid of her economic narrative

Ditching Gillard has put Labor back in the game. To stay there it will have to ditch her economic narrative.

Gillard’s narrative was dishonest, incapable of coping with changing developments and denied Labor its best selling point.

Unveiled in the keynote address to the Committee for the Economic Development of Australia just days before the spill it said the economy was “growing, stable and strong”.

“Growing” is the only one of those three words that is demonstrably true. “Stable” is rubbish. Gillard herself acknowledged in the speech there were “some complex transitions underway”. And the economy isn’t “strong”. If it was demand wouldn’t be shrinking in four of Australia’s six states and the Reserve Bank wouldn’t have cut interest rates seven times in eighteen months and be weighing up the need to cut further.

Gillard’s narrative went beyond the merely rosy. In Monday’s speech she came close to branding as a traitor anyone who thought differently.

Amid jokes about reporting journalists to the Australian Communications and Media Authority and attempts to belittle the growing number of forecasters who have pointed to the risk of a recession she said low expectations could “themselves become an economic problem”.

“The biggest mistake we could make would be to talk ourselves into unnecessary economic weakness,” she said.

A much bigger mistake would be to shut down such talk.

Smothering discussion builds distrust, in this case a feeling that the government doesn’t know and doesn’t care what’s happening on the ground. It’s the opposite of the exemplary approach Labor took during the financial crisis when it shared what it knew.

And smothering discussion, insisting things are “growing, stable and strong” leaves Labor with no easy way out when the daily drip feed of economic news turns bad.

It could try to ignore the bad bits of news and ridiculously over hype the good, as Gillard did in March when she latched on to a one-off blip in the employment numbers to boast to parliament: “We have seen an increase in the number of jobs of 71,500 in the last month. For the information of the House this is the largest monthly increase in jobs since July 2000, the best monthly job creation result in 13 years.”

The blip has since been revised away, as blips often are. Employment grew by a less remarkable 29,300 that month. It’s now growing at just a third that rate and trending down.

Or Labor could act surprised when the news turns bad. “We had no idea”, “we’ve been blown of course”... It’s the approach Wayne Swan used just before Christmas when reality caught up with his repeated assurances that he would be able to deliver a surplus.

Neither approach would play well during the campaign. The scrutiny will be even higher with the arrival of fact checking units. “We had no idea” won’t work as an excuse. And nor will overhyping the good news and ignoring the bad. Gillard had backed Labor into a corner.

And she had robbed it of its strongest selling point.

It’s Labor you would want on your side in a crisis. Just as John Howard happened to be in office during the Port Arthur Massacre and became an international legend by flawlessly handling the guns buyback, Kevin Rudd happened to be in office during the global financial crisis.

Labor has been tried by fire. It is Labor - in particular Kevin Rudd - you would want on your side in the event of an economic downturn.

I am not saying the perception is fair. Tony Abbott and the Coalition may turn out to be just as good in a crisis. But I am saying the perception is reasonable. Labor has been tested. Abbott has not.

Downplaying the economic risks facing Australia, insisting the economy is “growing, stable and strong” gives waverers a licence to vote for Abbott.

The alternative strategy is to level with the Australian people. Resource investment has peaked, commodity prices are slipping and China’s outlook is uncertain. Australia needs a safe pair of hands.

Rudd is already adopting it. Ending the week with a statement the polar opposite of Gillard’s he said Australia’s biggest economic challenge was “the end of the China resources boom”.

“This will have a dramatic effect on our terms of trade, a dramatic effect on living standards, and a dramatic effect also potentially on unemployment unless we have an effective counter-strategy,” he said.

It’s a truthfulness likely to draw Australians close to the prime minister and to make them feel he has has a handle on what’s happening.

The opposition’s Joe Hockey has already wised up. Back in January he was committed to a surplus “to the core of my bones”. Now he is less certain, saying that in returning to surplus it is “important to be prudent”.

“I would not be doing my job if I had not already given some thought as to how economic activity could be safeguarded should the downturn in the private sector become more protracted,” he said on Monday.

Rudd and Hockey are embracing reality. It’ll keep Labor in the game.

In The Canberra Times, The Sydney Morning Herald and The Age

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