Fundamental shift in the economy could be worse than you thought

Thursday, 23 July 2015  Media Alerts
​“An interest rate cut is still possible, if you believe today’s speech from the ‘governor’,” says Professor Richard Holden from the UNSW Business School.

“However we may be ignoring a more subtle message - that the cooling of the economy could turn into secular stagnation.”

Reserve Bank of Australia governor Glenn Stevens has today warned that the nation's economic growth is unlikely to average above 3 per cent.

“This is a problem. All the budget forecasts were for the economy to grow at between 3.25 and 3.5 per cent, and to do so for years. If the figures come in way below this, any hope of balancing the country’s books have been thrown out of the treasurer’s window, never mind what happens to iron ore prices,” said Professor Holden.

He says the speech appears to be a sign of a major shift in thinking within the RBA, with the weaker growth of recent years becoming the economy's ‘new normal’.

“This is part of the reason for the blow-out on the federal budget deficit. However, the budget picture may be worse than we believed, as we may be entering a period of secular stagnation. Low growth leads to low inflation, which becomes the current state of affairs for many years.”

An interest rate cut is possible, but Glenn Stevens has warned evidence of further economic weakness will not automatically trigger such a move, and indeed he said beyond a certain point, it can be dangerous.”

Professor Holden responds; “he has a point - look at countries like Japan, which had very low rates for two decades. It isn’t working to boost growth there.”

It comes as official inflation data shows consumer prices are rising only 1.5 per cent over the past financial year - below forecasts and below the level the RBA prefers. It aims to keep core inflation within a 2-3 per cent range over the course of the economic cycle.

“Stevens seems to accept what Larry Summers has been saying for the past 18 months. There has been a fundamental shift in the economy, with too many saving, chasing too few opportunities. It was just an illusion during the past decade that growth was high. That was purely due to an asset and commodities bubble,” he says.

Professor Richard Holden from the UNSW Business School can comment on the economy, interest rates, and the dollar. 

For comment call Richard Holden on 02 9385 4700, 0409 446 296 or richard.holden@unsw.edu.au​

Media contact: 
Julian Lorkin: 02 9385 9887 
fundamental-shift-in-the-economy-could-be-worse-than-you-thought-