Confidence, innovation absent from Aussie economy

In a speech to market economists in Brisbane yesterday, the Reserve Bank of Australia Governor, Glenn Stevens, said "in Australia, recent growth in the economy has not been as strong as we want."

Stevens noted that "the capital spending that was needed to lift the output of the mining sector has been completed, at least for the production of iron ore. Some very large LNG projects are still underway, but as those projects and others draw to a close, the decline in mining investment that is already underway will continue.

This opened the way for discussion on whether there is a need for governments to set up infrastructure projects. "It would be confidence-enhancing if there was an agreed story about a long-term pipeline of infrastructure projects," Stevens said.

"The financial sector would be attracted to the opportunities for financing and asset ownership. The real economy would benefit from the steady pipeline of construction work - as opposed to a boom and bust.

"It would also benefit from confidence about improved efficiency of logistics over time resulting from the better infrastructure," he said.

"We could unleash large potential benefits that at present are not available because of congestion in our transportation networks."

Stevens also took the opportunity to have a swipe at anti-debt ideology.

"The funding would be available, with long term interest rates the lowest we have ever seen or are likely to. And it is perfectly sensible for some public debt to be used to fund infrastructure that will earn a return. That is not the same as borrowing to pay pensions or public servants," he said.

"The impediments are in our decision-making processes and, it seems, in our inability to find political agreement on how to proceed."

In the Q&A session Stevens was asked about the neutral cash rate. He kept his comments fairly general, noting that: "whatever normal is today, it's lower than it used to be" and noted that the reasons for this are likely to continue for some time. He also noted that it will be "quite some time" before the RBA thinks about interest rates going up.

Later, though, the Governor described some developments in the Sydney housing market as "crazy", and "acutely concerning."

The financial markets saw the remarks as foreshadowing an implicit easing bias, despite rates remaining at record lows. "The Governor made crystal clear that official rate cuts remain on the table - we suspected the Bank retained an implicit easing bias, but there was no explicit bias included in last week's commentary," JP Morgan's chief economist wrote in a note to clients.