Saturday, June 9, 2012

Stevens: Why it doesn't feel as if we're doing okay

GLENN Stevens has three messages for us.

First, the economy is going better than we think: our glass is "at least half full".

Second, don't blame the mining boom for the rest of the economy growing slowly: rather, it's the hangover from our binge during the decade of debt.

And third, the days when "the effortless way to get rich was to gear into rising house prices" are gone for good. House prices and debt will not rise like that again. The Reserve Bank will not act "to pump up speculative demand for assets".

And we might draw a fourth message from the governor's speech in Adelaide: don't expect more interest rate cuts soon, unless things in Europe get really ugly.

The first message is hard to dispute after this week's bonanza of strong economic data even if Stevens hints gently that, like other economists, he takes the estimate of 4.3 per cent GDP growth with a grain of salt.

"The underlying pace of growth is probably not quite that fast, but it is quite respectable, something close to trend," he says. "If the recent data are taken at face value, the non-mining economy has grown at about 2 per cent over the past year."

Yes, but with the population growing at 1.5 per cent, economic growth of 2 per cent does not leave much new money to spread around.

And if the GDP number is revised down, as big growth numbers usually are, it leaves less again. Still, he's right: our glass is half-full.

The second message is his central one. Stevens is puzzled by why Australians don't see their economy as the island of growth it seems to outsiders.

He thinks much of our dissatisfaction really stems from the fact that household wealth is now going backwards, after a decade in which it averaged real growth of 6 per cent per head per year. But its growth was fuelled by sharply rising debt, and that had to end.

As we save more and spend less, Stevens says, real growth in consumer spending per head has roughly halved, but our financial position has strengthened: "A certain degree of thrift" is good for us.

His key point is that that thrift is a return to normal. It was the years from 1995 to 2007 that were unusual.

Retailing, banking, real estate and housing investors won't see those times again.

We need more confidence, he says, but "it has to be the right sort of confidence".

Our growth from here should be based on productivity, "doing things better, in 1000 different ways" not on speculation.