Wednesday, September 22, 2010

A tale of two economies: it's all in the figures, Guv

"Yes, I think it is going to be a two-speed economy . . . I think all those issues of geographical differences and industry differences are likely to re-emerge with a vengeance. The relative price of resources is high, that of manufactures is low. There are structural adjustment implications of this for our economy . . . they will, I think, probably intensify in the years ahead."

- Reserve Bank governor Glenn Stevens, February 19

"While some events can lead to a divergence in economic conditions across Australia, overall these differences have not been especially large in recent times . . . What is remarkable, in fact, is that the differences are not, in the end, larger."

- Reserve Bank governor Glenn Stevens, September 20.

IN MY next life, I want to be a central bank governor. People fawn on you, whatever you say is taken as gospel, and others rarely challenge it.

In Shepparton on Monday, Glenn Stevens had two messages. The first was to restate the Reserve's big-picture view of the future: a "fairly robust" mining-driven upswing ahead, requiring monetary policy action, better known as interest rate rises.

No argument there. Far more striking is the blunt language in the minutes of the Reserve board's September meeting, declaring that if that big picture is right, "it was likely that higher interest rates would be required". That means soon.

But his second message was more tendentious. The Reserve chief played down the risk of that resources boom dividing Australia into a two-speed economy. Indeed, he tried to persuade his audience that this hadn't happened, and wouldn't happen.

The only evidence he presented was a handful of graphs demonstrating that over a 10-year or 15-year time period, movements in prices and unemployment rates had differed less in the six Australian states than in the 50 states of the US or the 27 countries of the European Union. You don't say. I wonder if that might have something to do with the fact that states are always more alike than countries. Or that six units of anything offer less scope for differences than 27 or 50.

The Guv's choice of time frame also missed the point. We were not a two-speed economy 10 or 15 years ago. This emerged in the past five years, as mining investment and export revenues grew exponentially, the Reserve responded by driving up interest rates, which drove up the dollar, which made significant parts of our manufacturing, agricultural and tourism industries uncompetitive.

That is why the two-speed economy became an issue. It is why we in Victoria fear the consequences of an even larger mining boom, and an even higher dollar, ahead.

It is why Stevens himself warned just seven months ago that the problems of a two-speed economy "are likely to re-emerge with a vengeance" and "will probably intensify in the years ahead".

Look at the data for the past five years, as shown in the adjoining table, and you see why. Inflation, on average, was within the Reserve's band of 2 to 3 per cent in NSW, Victoria, South Australia and Tasmania. Only in the resource states was it over the Reserve's limit, yet that dictated interest rates for us all.

Or look at where the demand pressures on the economy were generated. In round figures, demand grew 45 per cent in WA, but 18 per cent in Victoria and NSW, and even less in SA and Tasmania. The overheating the Reserve feared did not happen here, yet the Reserve's response to it higher interest rates and a higher dollar pushed businesses here to the brink. Or take average weekly earnings: growth in WA over the past five years was almost double the growth in Victoria. The overheating was not happening here.

Take industry growth: over the five years to 2009-10, manufacturing output actually fell, albeit marginally, while growth in the hotels and restaurants sector averaged just 0.1 per cent a year. That's the real cost of a mining boom, and it's what people fear ahead.

Remember: the slowdown in the Australian economy began in the first half of 2008. It was not a consequence of the global slump: it began as our export revenue soared to a new high. It was the consequence of the Reserve's interest rate rises and the higher dollar they created.

Our fear is that is going to happen again now, with a vengeance, and intensify as Glenn Stevens forecast in February. The new Glenn should listen to the old one.