The Australian economy is positioned to benefit from its proximity to Asia but has to rebuild its financial defences for the next economic shock, the Reserve Bank of Australia (RBA) says.
RBA governor Glenn Stevens said the rate of economic growth during the next decade would depend partly on what economic policies were in place in Australia and the performance of economies in the Asia Pacific.
“As a broad observation, and definitely not as a precise forecast, we might expect that a decade from now Australia’s per capita GDP will probably be roughly 15 per cent higher in real terms than it is now, give or take a few percentage points,” Mr Stevens said at the Australian Industry Group’s National Forum in Canberra.
“The economic policy arguments, by the way, will all be about what policies might gain or lose those few percentage points.”
As the economies of the Asia-Pacific kept expanding, they would contribute more to their economic performance, Mr Stevens said.
“It used to be said that when the United States sneezed, Asia could a cold,” he said.
“Recently it seems that the United States has contracted pneumonia, while Asia sneezed and caught a bad cold, but then recovered pretty quickly.”
Australia’s proximity to Asia had been beneficial, but there were caveats in how the nation reacted to this boom.
“The emergence of Asia is to our advantage, if we respond to it correctly,” he said.
“But there is no free ride from the global or regional economy and there will never will be.
“Nor is it to deny that a country’s own policies, for better or worse, and followed over a long period, also make a significant difference to its economic outcomes.”
Mr Stevens said the current economic environment was similar to 2006/07 in deciding movements on interest rates.
Then Australia had a build-up in strength and other nations were experiencing “various wobbles”.
“No one knew which way these two forces would ultimately net out,” he said.
“All one can, and we have said this, is to respond to what you think the central scenario is and think about what other things can happen and be ready to respond to those quickly if they occur.”
Mr Stevens said Australia responded swiftly following the global financial crisis in 2008 due to years of investment in sound policy structures.
“So we have to remake those investments in order that next time there’s some big event we have the same scope and flexibility to respond to the new event,” he said.
Mr Stevens said the focus on more flexibility in exchange rates recently, particularly in key emerging nations in Asia, would not create global growth on its own but just re-distribute it.
“Unless the exchange rate changes were accompanied by more expansion in demand globally, we would not have solved the problem of excess capacity, we would only have relocated it,” he said.
“The additional step needed is stronger domestic demand, compared with what would otherwise have occurred, in the countries whose currencies would appreciate in such circumstances.
Structural changes such as lowering the national saving rates in countries like China would occur over time, and people should be realistic about the extent that exchange rate flexibility would contribute to the unbalanced growth in the global growth at least over a few years, Mr Stevens said.
“It is definitely part of the answer (and it is surely in the interests of the countries with closely managed rates to accept more flexibility), but it is no panacea,” he said.