Glenn Stevens’s Shepparton speech yesterday was as usual carefully dissected for its implications for interest rates, an indicator now used by most of the media in the same way as they used the Current Account Deficit in the 1980s, an all-purpose economic indicator deployed regardless of meaning or importance in all economic analysis. As Glenn Dyer shows elsewhere today, this sort of over-reading routinely misses the efforts of the RBA to offer an ongoing narrative about what is shaping its thinking.
But the Governor’s long-scheduled speech was noteworthy for a couple of issues that complicate — or perhaps, to look at it from another point of view, enrich — our understanding of the Australian economy.
Stevens, it seems to me, very subtly — he was in regional Australia, after all — took issue with the notion of automatic regional disadvantage. His real target was the idea of a two-speed economy — a concept that many of us have become comfortable with using. Stevens offered a corrective, pointing out not merely that in any modern economy the benefits of a resources boom could hardly be confined to the region or even the state in which it was occurring (he pointedly noted that until recently Victoria was growing more quickly than WA), but that in Australia large “shocks” like the resources boom tended to have a less differentiated impacts on regional employment than is seen in Europe or the US. Stevens pointed to figures that showed regional variations in unemployment levels are much starker overseas than here.
But inherent in that critique of the idea of a two-speed economy is the suggestion regional disadvantage is not automatic, that in a “a well-functioning, integrated national economy” the benefits of economic growth do not somehow stop at the outer suburbs of the capital cities. Indeed, Stevens points out, unemployment in the Hunter region in NSW is close to zero.
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In fact, while Stevens doesn’t mention it, most of the resources boom is occurring in regional communities — communities that are consequently suffering all the problems of high growth — inadequate infrastructure, lack of housing, poor social facilities, inflation — rather than the traditional problems of declining population and lack of employment opportunities.
And while one assumes Stevens wasn’t reflecting on recent political events, his remarks take on a certain piquancy now that regional development is again flavour of the month courtesy of close elections.
As pretty much everyone has noted about Stevens’s comments, the clear conclusion from yesterday’s speech and recent comments from other RBA executives is that inflation is of growing concern given the resources boom and likely to guide further tightening of monetary policy. As this morning’s minutes from 7 September put it, “members observed that previous investment booms and increases in the terms of trade had posed significant challenges for economic policy, and that high levels of resource utilisation were likely to put pressure on inflation.”
Whether commentary on the next interest rate rise reflects that, however, remains to be seen. During the election campaign we were still mired in this facile debate about whether the Government’s stimulus packages would drive interest rates higher. As the RBA Board notes in the September minutes, “public demand continued to contribute to GDP growth in the June quarter, though by significantly less than in earlier quarters, and it was expected to subtract from growth over the next few quarters as stimulus projects were gradually completed.”
In fact the forthcoming rate rises should be clearly labelled for what they are — the result of the resources boom.
While its motivations may have been decidedly mixed and it never would have admitted to it, the Rudd Government’s RSPT was an attempt to bring a policy other than the blunt instrument of interest rates to bear on the impacts of the resources boom. Far from the mining sector being so fragile that an attempt to skim some super-profits off the top to fund infrastructure and more competitive tax rates would have spelled its doom, the sector is in such ferocious good health it is driving interest rates up and facing skill shortages.
Of course, we knew that all along in spite of the propaganda from the miners and their media cheerleaders. But as mining drives rates higher, we might start to wish that the apocalyptic warnings of the miners that Kevin Rudd had somehow permanently weakened the industry were faintly true.
As it is we’ll all just sit back and let the RBA do the work of managing the boom. But at least the miners and their spruikers in the commentariat should have the good grace to accept some responsibility for that.