Australia to Look Like Another Planet for Stevens Successor

  • Inflation not a problem for the first time in four decades
  • Boom turns bust as export prices slide, investment slumps

Australia’s next central bank governor will inherit an entirely different set of economic conditions and risks than Glenn Stevens, who retires next year, faced when he took the helm a decade ago. The top challenge: getting growth back.

Chances are that task falls to Stevens’s deputy, Philip Lowe, according to economists. Here’s how the economic environment, international challenges and political backdrop look, with 11 months to go until Stevens’s term concludes.

Philip Lowe and Glenn Stevens

Photographer: Ian Waldie/Bloomberg

Australia’s Weaker Growth

The economy expanded just 2 percent in the second quarter from a year earlier, compared with 5.1 percent in the first year of Stevens’ tenure. The International Monetary Fund said last month that, in the medium term, potential growth is likely to be around 2.5 percent compared with 3.25 percent in the past.

Export Boom Over

Stevens’s early challenge was setting policy amid rising prosperity spurred by soaring export prices. He noted in 2010 that a ship-load of iron ore to China could buy 22,000 flat-screen televisions, up from 2,200 five years earlier. His successor faces sliding terms-of-trade and a slump in mining investment that the central bank estimates is only half done.

Job Creation Slower, Jobless Rate Higher

The jobless rate was 6.2 percent in September 2015, hovering near a 13-year high, compared with 4.5 percent in Stevens’s first full month in office.

Wage Growth Weak

Wage growth, which previously helped ease consumer-debt burdens and boost household consumption, has slowed to a pace that the central bank describes as recessionary. Incomes grew 2.3 percent in the second quarter from a year earlier, little more than half the 4.2 percent growth in the same quarter of 2006. The silver lining? -- the Reserve Bank of Australia says constrained pay rises are helping keep a lid on unemployment and inflation.

Inflation Tamed?

Lowe, if he gets the nod, could be the first governor in more than 40 years who doesn’t have to wrestle with excess inflation. When Stevens took the helm in the third quarter of 2006, inflation was 4 percent -- well above the RBA’s target of 2 percent to 3 percent. It climbed to 5 percent in the third quarter of 2008, before the global financial crisis pulled it back. In contrast, prices rose just 1.5 percent in the second quarter from a year earlier, even as a weakening currency put pressure on the cost of imports.

Economic Vulnerabilities Are Also Different

Domestically, housing prices are soaring, fueled by a record-low 2 percent benchmark interest rate. In Sydney, the average price in September was A$920,000 ($717,300), up 23 percent from a year earlier. Compare that with A$477,000 in September 2006, which was down 0.6 percent from 12 months prior.

Andrew Charlton, director of consultancy AlphaBeta in Sydney, says resources now make up more than half of Australia’s exports, compared with 2000 when they accounted for less than a third. The country’s exports base is at its narrowest since the Korean War wool boom in the 1950s.

On the international front, the key issue is China. While the world’s second-largest economy accounted for much of the A$1 trillion in extra export earnings that Australia reaped during the mining boom, the Chinese leadership’s efforts to transition to consumer-led growth will reverberate Down Under.

Stevens also oversaw a continued winding down of manufacturing in the economy -- partly due to Dutch Disease as the resource boom sent the currency to a post-float record of $1.10. This was capped by auto manufacturers deciding to cease production in the country.

Low Interest-Rate Ammo

Lowe would inherit a lot less policy ammunition to deal with any severe downturn. Stevens took over with the cash rate at 6 percent and raised it to 7.25 percent in March 2008. He was able to lower it by 425 basis points during the global financial crisis to 3 percent to cushion the economy. As growth revived, he tightened to 4.75 percent in November 2010, before cutting by 275 basis points as the mining boom wound down.

Political Musical Chairs

The political environment has become less stable, elevating the status of the central bank and its steady hand on policy. When Stevens took over in September 2006, the same prime minister had run Australia for 10 years. In the intervening decade, the country has had six leaders and its first minority government -- both firsts since World War II.

Malcolm Turnbull, Australia's sixth prime minister in ten years

Photographer: Mark Graham/Bloomberg

Fiscal Well Dry

Not only does Australia lack monetary policy firepower, but its fiscal options are more constrained. In 2006-2007, the country ran a budget surplus equal to 1.6 percent of gross domestic product, giving the government broad room to stimulate the economy to avert the 2009 global recession. In fiscal 2015, the budget position had reversed to a deficit equal to 2.5 percent of GDP.

Currency Blessing

On the plus side, the Australian dollar has dropped about 25 percent in the past two years, improving the competitiveness of exporters and easing monetary conditions in the economy. Still, with the Aussie trading at 72.78 U.S. cents, it’s not far off the 75.20 cents when Stevens took over on Sept. 19, 2006.

Before it's here, it's on the Bloomberg Terminal.