Amid all the fanfare over the International Monetary Fund’s latest stability report and its terrifying forecast of potential losses of $US4.1 trillion (around $A6 trillion) for world banking, it would pay us in Australia to heed a speech in Adelaide yesterday by Reserve Bank Governor, Glenn Stevens.

Stevens laid out the reasons why he thinks Australia will recover more quickly than many other countries, and why this could appear late in 2009.

Its optimism is contrary to the unremitting gloom in the IMF’s latest Global Financial Stability Report which claims the deteriorating global economy means financial institutions now face losses much greater than previously estimated.

In contrast, Mr Stevens’ optimism obvious as he again pointed out that Australia’s financial system was stronger, our banks healthier and that we had not had to bail out or cover the losses like Governments in the US, Japan, Germany and the UK were doing.

In fact there is a dramatic difference between the picture painted by the IMF about the sorry state of the world financial system, and Australia’s.

It also raises the question of who is right domestically about the outlook for the economy: the RBA or the Rudd Government. Yesterday, Rudd revealed plans for a third stimulus package in the Federal budget next month.

Given that the Government has whipped up $52 billion of extra spending in two stimulus packages; the RBA has cut rates by 4.25% (the biggest and fastest easing in monetary policy we have seen) and oil prices have fallen sharply, boosting disposable income in 2009, it’s hard to see the immediate need for a third stimulus package.

The RBA wants to wait to see what the stimulus does to demand and output. As it revealed in the April 7 minutes released yesterday, it revised down its economic forecasts. In his subsequent speech Mr Stevens confirmed the bank now saw the economy as in recession (or almost there). But it’s still uncertain as to what the triple hit of lower rates, spending and lower oil prices will have on the economy.

In his speech in Adelaide, Mr Stevens did point out that consumer confidence in Australia, while down because of the impact of the financial crash and slide into a slump, was much stronger than confidence levels in major economies overseas. As well, consumer expectations about their financial position had not changed very much in the past few years, which he also said indicated high levels of confidence in the future, in contrast to current low levels of business confidence.

And Mr Stevens said that confidence would be a major factor in Australia this year: the way he spoke yesterday, he believes Australians should have far more confidence in our economy than they do, even as unemployment rises and demand eases.

The IMF said that many loans sitting on institutions’ balance sheets were eroding in value, not just the toxic sub-prime securities which first triggered the crisis. These are higher rated loans to corporates, households and other areas of business, and governments.

The Fund last week warned that the global recession will be deeper and last longer than previously estimated because it was synchonised and was caused by a nasty, deep financial crash. It said any recovery would be slow and low. Tonight, the IMF releases updated economic growth forecasts for the world and major economies in its new World Economic Outlook (WEO). They won’t be nice for the US, Europe and Japan, with Eastern Europe and many emerging economies likely to be hard hit.

But for China and some emerging economies like India and Brazil, the forecasts might be a bit brighter. And that in turn that will mean a brighter outlook for Australia, as Mr Stevens acknowledged yesterday.

He raised a series of questions about what Australia does after the recession ends and the recovery starts:

Perhaps there is also some value in articulating a view of where we want to get to when the cyclical downturn ends, as it will, and recovery takes hold. What sort of country does Australia want to be, economically, during the next expansion? How do we want to be positioned in the global marketplace for capital, in an environment in which markets will have absorbed a lot of government debt and will be evaluating opportunities for other uses of capital?

I suggest that Australia has a very good chance of offering an economic setting in which the following conditions hold.

First, political stability remains assured — something becoming a bit less common.

Second, the Government does not own, and has not had to give direct financial support to, the banking system. Australia will be free of the difficult governance and exit strategy issues that such support is raising in a number of countries.

Third, public finances remain in very sound shape, with modest debt levels and a medium‑term path for the budget back towards balance. Without the massive obligations arising from bank rescues that will inevitably narrow the options available to governments in other countries, Australia should be able to articulate such a path more effectively than most.

Fourth, sensible policy frameworks – both macroeconomic and microeconomic – remain in place; the financial regulatory system is strong and tested.

Fifth, we remain open for trade and investment, and have a capacity to deploy both our own and other people’s capital carefully and profitably.

Finally, there is an exposure to, and an engagement with, an Asian region that still has the most dynamic growth potential in the world, where hundreds of millions of people will for decades to come be seeking rising living standards.

There are rather few countries that have the potential to offer so attractive a proposition to international capital, and to their own citizens, over the years ahead. It is a proposition that, if pursued sensibly and consistently, offers the most secure basis for confidence in Australia’s future. It is such confidence that, more than anything else, will help to drive us along the road to recovery.

So no fears about a debt crisis domestically or internationally, no fears about any current account problems and no fears about a house price crisis: all the bugbears raised by many commentators and some conservative politicians in the wake of the crisis dating back in August 2007.

By contrast, Stevens said “Australia’s genuine long‑term economic prospects remain good, and there remain good grounds to think that we will continue to weather the storm better than most.”

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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