Australian position 'enviable'
Willem Buiter, a former chief economist for the European Bank for Reconstruction & Development, is in Australia this week on a rare visit.
Professor Buiter - who has also advised the World Bank, International Monetary Fund, and Asian Development Bank - praised Australia's economic managers, saying the country had enough monetary and fiscal "ammunition" to handle another adverse economic shock, unlike other economies.
"[Australia's] growth record since the start of the financial crisis ... has really been the envy of the advanced economic world," said Professor Buiter, who is now the chief economist of global bank Citigroup.
"That is due to the huge lift the country has had from the commodity terms-of-trade shock, and from the investment boom in mining," he said. "But it's also partly due to surprisingly sensible macro-economic management. They've just messed up much less than is the norm in advanced economies."
His comments come as the Reserve Bank prepares to meet on interest rates next week, and as the Rudd government prepares to announce a date for the election.
Futures markets are tipping a 90 per cent chance of a rate cut next week, given few signs of inflationary pressures in the economy.
In a key speech earlier this week, Reserve Bank governor Glenn Stevens warned investment in mining was set for "a big fall" and he was yet to see a pick-up in business and housing investment.
He also said business confidence was "subdued".
Meanwhile, Professor Buiter said Australia's economic output still remained close to "potential", and it was much harder to sell the line here that our central bank needed to keep rates "lower for years", which is what will be required for Europe's economies to decouple from US long-term interest rate increases.
"It's really a reflection of the success of previous policies," Professor Buiter said. "You're not in the soup, you're not in a liquidity trap ... so if your economy were to get another unpleasant hit from China or elsewhere, you actually have monetary ammunition in the arsenal to match it," he said.
And thanks to "extremely cautious fiscal policy", there was also fiscal ammunition in the tank. "This is a very unusual place to be in, to see a headline suggesting that the governor of the central bank is encouraging the cabinet to be less restrictive in fiscal policy is something that I had given up hope of ever seeing," Mr Buiter said.
"Australia's position is not without issues, but [its] problems are luxury problems compared to those in the rest of the advanced economy universe."
Economists have been revising down expectations in recent months, due to weaker growth in emerging markets. This represented a "clear changing of the guard", Professor Buiter said, as developed economies would once again carry the weight of global growth.
Frequently Asked Questions about this Article…
Willem Buiter is a leading economist and Citigroup's chief economist. In the article he praised Australia’s economic management since the financial crisis, saying the country’s growth has been “the envy of the advanced economic world,” helped by a commodity terms‑of‑trade lift, a mining investment boom and relatively sensible macroeconomic management.
According to Professor Buiter the answer is yes: Australia still has monetary ‘ammunition’ to respond to another adverse shock. The article also notes futures markets were pricing about a 90% chance of a rate cut at the Reserve Bank meeting next week, reflecting little sign of inflationary pressure.
Glenn Stevens warned that mining investment was set for “a big fall” and said he had yet to see a pick‑up in business and housing investment. He also described business confidence as “subdued,” signalling weaker domestic investment activity.
Professor Buiter said Australia’s economic output remained close to ‘potential,’ and that it is harder to argue the central bank needs to keep rates “lower for years” as is the case for some European economies. In short, Australia is not facing the same prolonged low‑rate environment.
The phrase means Australia does have economic issues, but they are modest compared with problems in many other advanced economies. Buiter used the term to emphasise that Australia is in a relatively strong position with policy tools available to manage shocks.
Economists have been revising down growth expectations recently because of weaker growth in emerging markets. The article describes this as a “changing of the guard,” where developed economies may again shoulder more of global growth—something investors should watch when assessing market and sector risks.
Buiter praised Australia’s “extremely cautious fiscal policy,” saying it left fiscal ammunition in the tank. He noted it was unusual to see the central bank governor encouraging the cabinet to be less restrictive on fiscal policy, implying the government has room to respond to a downturn if needed.
The article highlights two near‑term events: the Reserve Bank of Australia’s interest‑rate meeting next week (with futures pricing a high chance of a cut) and the Rudd government preparing to announce an election date. Both could affect market sentiment and investor decisions.
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