Over the past few weeks, the Reserve Bank has been taking on a new role. In a series of public statements it has been encouraging Australians to look for the bright side in the deep economic gloom now upon us.
The Bank’s governor, Glenn Stevens, was at it again on Friday when he met a parliamentary committee in Canberra.
Stevens — and his team of senior managers — walked a fine line as they answered questions put to them by the House of Representatives Standing Committee on Economics.
They don’t want to be seen as pollyannas, so they admitted quite frankly that the nation’s short term prospects are "weak".
But there was another underlying message in what they had to say. They spoke of the hidden strengths still in the Australian economy. And they put the case for confidence so strongly in fact, that given the scale of the crisis some might reasonably accuse them of talking up the economy — what economists call "jawboning".
Stevens isn’t alone in this. Kevin Rudd and his Treasurer, Wayne Swan, have been doing it for months. So has the Federal Finance Minister, Lindsay Tanner, who has been reminding Australians that recessions, typically, have a "psychological" dimension as well as an economic one.
But since Stevens is one step back from the political front — and an acknowledged expert — his words carry extra weight.
So what does he see? In Stevens’s own words, "there are reasonable grounds at this stage to think that the Australian economy will come through this very difficult period — certainly not unscathed — but well placed to benefit from a renewed expansion".
Stevens and his team gave an up-beat performance at a fairly bleak moment. Less than an hour before he spoke, the Dow Jones Industrial Average closed at its lowest level for six years. But even that didn’t throw Stevens off balance.
Nor did a particularly blunt question from Canberra schoolgirl Peldon Tenzin, one of the students that the committee had invited to participate in the day’s proceedings.
"How low are you willing to let interest rates go […] to help stimulate the economy?" she asked, noting that the UK had a 1 per cent marker rate while the comparable US rate stands at 0.75 per cent. At 3.25 per cent, Australia’s rate is positively Olympian by comparison. "We will be prepared to go low enough to do what is needed," Stevens replied quietly and with surprising frankness.
But what, exactly, are the signs the Reserve Bank finds encouraging when all most other players can see is deep gloom?
Once again, Stevens was frank as he approached this point. "Things will be difficult over the next year … But as I have said before, the long run prospects for Australia have not deteriorated by as much as we may all be feeling just now. China’s emergence, for example has not yet finished."
Stevens said that although China’s growth had slowed recently, its development still had years to run, "and Australia will benefit from that," he said.
Australia’s banks, too, are strong according to the governor, and the nation’s housing sector is not "overbuilt" as it is in the United States. "Instead, there is considerable pent-up demand and affordability is improving quickly," he said, in one of those statements often used in central banker-speak which rather coldly skim over the countless hopes, fears and pains of people struggling with rents, mortgages and house prices.
Stevens also supported the Federal Government’s two big stimulus packages, saying that there is already evidence that the first of them, announced just before Christmas, is working. "I think the indications are that the pre-Christmas package did have quite a measurable impact on consumer demand," Stevens said.
Stevens also dismissed suggestions from Liberal MPs that at $42 billion the Government’s second package is excessive in the present economic climate.
The second big question of the day came from another student, Andrew Gibson, who asked how much foreign debt Australia could build up before foreign investors lost confidence in us.
Stevens replied that if foreign capital was used productively rather than wasted, those who employed it would be able to meet the obligations that went with it without too much trouble. Which is as much as to say that it’s not the size of the stimulus that counts so much as what you do with it — and that the country needs to use the money in the most productive way possible to overcome the stress of a debt as big as ours is going to be.
Over the course of their appearance on Friday, Stevens and his team were careful to distinguish between Australia’s "weak" short-term prospects and its medium-to-longer-term outlook, which they saw as stronger.
But, as that other handy economist John Maynard Keynes would say, "in the long run we are all dead".