The RBA's role is limited. Government must do much more.
FOUR years after the world's most advanced economies lurched into an abyss, the ramifications still ripple through the financial world. Investor confidence remains tepid at best, although no longer skittish. Unemployment is stubbornly high in the US and in many European countries, although there have been signs of jobs growth in the US in recent months. Demand for China's manufactured goods has eased and China's leaders have deliberately trimmed economic growth, leading to a fall in prices paid for Australia's key exports of iron ore and coal.
In Australia, the economic tempo is much better than overseas, but you could be forgiven for thinking otherwise because we seem gripped with despondency, intimidated by low growth in our wages, sharemarket investments and superannuation portfolios, and confounded by the continuing malaise in the property market. All that negative sentiment is feeding into our patterns of spending, so we are saving more and causing grief for retailers. We want more, we expect more, and we wonder why Australia is not experiencing the kind of relentless increase in assets prices that it did a decade ago.
Well, the simple message from the Reserve Bank seems to be get over it, the world has changed. Whether we appreciate it or not, this economy is doing rather well, comparatively speaking. That is why the RBA yesterday kept official rates steady at 3.25 per cent, putting paid to the forecasts of most economists. It saw no good reason to cut rates, despite calls from some sectors that a rate cut would kick the consumer and property markets into gear. It was a big disappointment to the business community, which bemoans the high Australian dollar, and it will do nothing to motivate property buyers.
The RBA does not expect global conditions to improve markedly in the short term the risk is that they could worsen but there is positive news in so far as credit markets are more open than they have been in years Australian banks and businesses are not finding it difficult to access finance.
The biggest concern for the RBA is, as always, inflation. While the official data for September indicated inflation was running at 2 per cent a year well within the RBA's mandated target range of 2 to 3 per cent through a cycle there are signs inflation may be on the rise. Softer conditions in the labour market, including layoffs in manufacturing and retail and the decision by mining companies to defer some spending on infrastructure and mines expansions, has kept wages in check for now. Some economists are reading a lot into the RBA's decision they suggest the next move on interest rates will be up.
From a Victorian view, The Age would have welcomed a rate cut. It might have spurred consumer confidence and, as a result, business investment. It might also have given some impetus to the housing and construction sectors. A rate cut might have trimmed the sails of the currency. As it is, the high Australian dollar is hampering our tourism, education and manufacturing industries and dampening returns for the mining sector.
Still, the RBA can do only so much its brief for tinkering with economic settings is limited. The prime responsibility for creating favourable economic conditions rests with federal and state governments, which these days tend to have a myopic focus on balanced budgets or fiscal surpluses, regardless of whether revenues have recovered as expected.
The goal of a budget surplus is inherently admirable, but now is not the time. Indeed, trying to achieve that political goal only sedates the economy, not expands it. Making things worse is the constant uncertainty about whether any government policy initiative can muster the support of independents and get through. In the meantime, the inane political point-scoring that passes for policy debate these days is doing nothing to inspire public confidence and adds only to the general weariness.