Treasurer Wayne Swan describes today’s 25 basis point cut to the official cash rate as “the early Christmas present that hard working Aussies deserve.”
In a press conference after the Reserve Bank announcement, Swan told Australian’s “We’ve now had the equivalent of seven rate cuts over the past year and of course that’s been made possible by the Government’s economic management, strong budget management and, of course, contained inflation. But it’s also good news because it comes at a time when unemployment is low and economic growth is in much better shape than many other developed economies.”
Today’s rate cut brings the cash rate to 3.00 per cent equal to the low recorded during the heights of the Global Financial Crisis (GFC), a point not missed by one journalist who quizzed Swan with “Didn’t you once refer to the level of three per cent as an emergency level, so how can today be all good news?”
But Mr Swan was quick to say things are different now. “Well, I’ve noticed today that there has been some characterisation about the level of rates now and a comparison with the level of rates back at the height of the Global Financial Crisis. Anybody who thinks that rates are at their levels now for the same reason they were at lows during the Global Financial Crisis simply can’t be taken seriously when it comes to economic policy.”
Kicking the can down the road.
Many will know since October 2008, I have been predicting a day when the wheels once again fall off and the Reserve Bank is forced to cut interest rates in vein to levels surpassing the GFC. How did we know?
We will let Wayne start the story. Earlier today he said, “Let’s go back to the Global Financial Crisis: the global economy fell off a cliff, global growth was minus 0.6 per cent back then. Global growth is just below trend right now. Anybody who is making a comparison between rates then, at the height of the Global Financial Crisis, and rates now and saying that they are at the same level for the same reason, is simply unqualified to run a modern economy.”
Unqualified to run a modern economy
In the two decades prior to 2008, Australian households had an insatiable appetite for debt. Household debt levels grew from 40% of household disposable income to just shy of 160%. 90 per cent of this debt was “invested” in the residential property market. But we were not alone, many countries saw similar unsustainable growth in household debt levels or house asset prices and this lead to the GFC.
But, in Australia we pretended everything was fine. With debt levels this elevated, a housing crash and associated deleveraging cycle would have been catastrophic to the wellbeing of our country. The then Prime Minister Kevin Rudd said “As Prime Minister I will not sit idly by and watch Australian households suffer the worst effects of a global crisis we did not create.” It was clear; we had no role to play in this. None the less, an unprecedented stimulus package was needed to counter the effects.
If a source of David Llewellyn-Smith is right, the GFC stimulus package was designed by Treasury and provided to the Government with one omission. Yes, it was missing the First Home Owners’ Boost (FHOB). Our politicians threw this gem in later.
Rather than try to encourage Australian’s away from their debt addiction, the Government embraced it. Free money was offered to naïve young Australian’s to leverage up into the Australian dream. Instead of letting an unsustainable bubble burst, they assisted to turn a large bubble, into an even bigger one; I suppose you could call it a super bubble.
From the Government’s point of view, it was a leveraged stimulus plan – The Government provides $7 or $14k and gets tens of thousands, if not more, effective stimulus in return. Leverage had worked so effectively for decades prior.
Treasury executive minutes on the First Home Saver Accounts stated “The FHOB was announced 14 days after the FHSAs became available as part of the Government’s first stimulus package designed to counter the effects of the global financial crisis. This short-term stimulus was designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market.”
It begs the question then, what happens when the stimulus finishes and all the first home buyers have brought their purchases forward? What, or who will fill the void?
This is the answer:
No one. Credit growth for housing is now running at levels not seen since records started 35 years ago.
Really, who would have guessed?
Falling house asset prices and deleveraging is now denting consumer confidence. The official cash rate might be 3.00 per cent but no one is buying.
Double trouble in The Lucky Country
While household debt levels were rapidly rising around the world, so was consumption. China was the biggest beneficiary. When the world economy ground to a halt in September 2008, China too, like many other economies was forced to enact stimulus measures.
For China, it told its state owned enterprises (SOEs) to build stuff – new office towers, new shopping centres, and new apartment blocks, new highways and railroads. To do this, they need resources – Australia’s resources.
Clearly, I am hardly qualified to run a modern economy, but you have to ponder what the outcome would be today, if Australia’s elevated housing bubble was left to correct and households were to deleverage. As luck has it, we may have been supported through this difficult time from a mining boom caused by China’s stimulus package. Observing the United States housing market, asset prices have almost returned to sustainable long term trends.
Instead, we now have more headwinds and challenges ahead.
China’s stimulus is running out as SOE’s crippled with debt start winding back fixed asset investment. This has caused Australia’s mining investment boom to wither, at the same time local residential construction is plummeting due to affordability and risk aversion.
The perceived safety of Australia has caused the Aussie dollar to remain artificially high and as Dutch Disease settles in, manufacturing is dying a slow death. In a once supercharged economy, productivity has taken a back seat.
But our Government does have a plan. It hopes housing construction can take over from where our commodities super cycle left off. I guess all we need is more leverage and another housing grant.
» Press Conference, Treasurer Wayne Swan – 4th December 2012.
» Statement by Glenn Stevens, Governor: Monetary Policy Decision – The Reserve Bank of Australia, 4th December 2012