The GFC: 10 years on
Corker of a speech from the Reserve Bank's Debelle yesterday where he revisited the global financial crisis, how it appeared to play out in real time, and what lessons can be learned about liquidity and response measures.
Australia pulled through the global financial crisis in far better nick than most other advanced economies, explained Debelle, thanks to a combination of factors and policy responses.
This considered speech inevitably attracted a lot of airtime because it made reference to QE (quantitative easing) as an available policy tool.
However, this is one of those times to read what the relatively sanguine speech actually said rather than how it gets interpreted across various media channels!
Whatever it takes (5 measures)
I often get asked what would happen if the economy and housing markets really turn to mush, which is a reasonable enough question to ask for those with a long-term horizon.
If you're interested this is a very useful speech to pick through, as many of the answers are touched upon, with the overriding message being that liquidity is vital.
It's important to note at the outset that the Reserve Bank still believes that the next move in the policy rate is up, whatever proves to be reported about this speech in the media.
This may prove to be true, although the latest OIS pricing doesn't suggest that this necessarily means any time soon.
Source: Martin Whetton, ANZ
If required, however, there is scope for further reductions in the policy rate.
So that's one measure: a cash rate being cut closer to the zero lower bound.
Secondly, there is quantitative easing as a policy option in Australia, as used by some other countries during the crisis (while acknowledging an important point: that the traction in Australia is mostly at the short end of the curve, rather than at the long end of the curve, which might limit the effectiveness of QE here).
We already know that the Reserve Bank can also expand its balance sheet, which is a third possible policy measure.
Fourth, Australia is fortunate because it has relatively low government debt - as well as a Federal Budget now back in balance - so there is ample scope for fiscal stimulus, which is something we did see plenty of during the Rudd years.
And, fifth, the floating Aussie dollar can continue to act as a shock absorber, as it has done for the past 35 years (happy anniversary this week, by the way!).
The key point, noted Debelle in an analogy, is to understand the plumbing and to keep the credit pipes flowing. In his own words:
'In a crisis, go fast and go hard. Don't die wondering'.
Apartment construction collapsing
As a real estate advocate I'm duty-bound to point out one quibble, that Australia is apparently unique in reducing its housing prices with falling unemployment.
This may be true in real time, but of course unemployment is a lagging indicator, and you can only squeeze lending so far before there's a knock-on impact to construction employment and consumption (in all fairness this has been acknowledged; it's simply a matter of degree rather than principle).
The Reserve Bank has itself previously estimated that of construction employees - of which there are about 1.1 million or so in Australia - around ¾ are directly employed in the residential sector.
New apartment sales have utterly dried up, and AiG's Construction Index released earlier today contracted to its weakest level in years on November with a reading of 44.5, and with apartment construction collapsing to a dire reading of just 31.0.
Source: AIG
Granted, it's not all gloomy news in the construction sector.
Indeed, there are cost pressures relating to some resources and infrastructure projects as employers have struggled to fill skilled vacancies away from the major employment hubs.
My sense is that it will take some meaningful pay packages to drag workers to go FIFO or regional again, so this could push wages in some parts of the the construction sector higher.
Overall, a very interesting speech, and well worth a read!
