Missing Element In Rudd's War On Inflation
Sydney Morning Herald
Tuesday January 22, 2008
WE CAN'T say we haven't been warned. Yesterday's speech in Perth by the Prime Minister, Kevin Rudd, and Friday's speech in London by the governor of the Reserve Bank, Glenn Stevens, both make it clear that inflationary pressures in the Australian economy are the main worry of policy-makers rather than a credit crunch feeding through from the subprime home lending collapse in the United States.
We should all be looking nervously at the consumer price figures for the October-December quarter of last year that will be published tomorrow. These will tell us how far underlying inflation is pushing beyond the 2 to 3 per cent comfort zone set by the central bank, and suggest how Mr Stevens and his fellow directors will weigh the situation when they meet to decide on interest rate settings two weeks from now.Mr Stevens is telling us the subprime crisis doesn't look so bad, at least on what we know so far. The American economy is still growing, thanks to strong consumption and business investment and an improving trade balance as the US dollar floats downwards. But there is definitely a slowdown, and this is partly matched in the European econ-omies. Will this affect the Asian and other emerging economies which, as Mr Rudd reminds us, drove two-thirds of global growth last year and two of which, China and India, have provided 40 per cent of Australia's recent export value growth?Not so much, our leaders are telling us. Asian investors have small exposure to subprime loans, and their banks rely much less on wholesale lending (in which a lot of subprime loans are parcelled out) than banks in developed countries. Emerging economies, especially in East Asia, are highly dependent on exports to the US, and a lot of the intra-Asian trade is actually part of the supply chain feeding the US- or Europe-destined exports of others (such as disc-drives from Malaysia or microchips from Taiwan going into computers assembled in China). But many of these economies are in hyper-growth, and their governments would welcome some moderating pressure that would still leave growth at double what developed economies would regard as strong.In one of the most telling comments on how Australia's settings have shifted in just a few years, Mr Stevens is telling us to study China, a lesson not yet learnt by our sharemarkets, which still slavishly follow Wall Street. "If China does suffer a serious interruption to growth at some point - and all economies do from time to time - it is more likely, in my judgment, to be caused by some domestic problem than by the sort of events we are witnessing in the developed world at present," he observes. "For Australians, it will be just as important over the years ahead to keep an eye out for imbalances in the Chinese economy as to watch the problems of the US economy."So the east wind is blowing hot, and Mr Stevens even notes that the synchronised nature of the worldwide lift in prices of energy, foodstuffs and industrial raw materials is "eerily reminiscent of the early 1970s". The difference is the restrained reaction in wages, partly due to reduced trade union power but also to lower inflationary expectations, including a trust that price fluctuations are short-term. But with price increases due to sustained demand, from new consumers in the developing world, this perception could change. In such a situation, central bankers would be less confident that taking the foot off the interest rate brake, to keep up growth, would not add fuel to inflation.In this context, Mr Rudd's promise to keep to a bigger than projected budget surplus for the 2008-09 fiscal year is a welcome one. But the mere promise of greater fiscal stringency from midyear is unlikely to sway the central bankers in the coming months, and nor should it. And it's not at all clear how, in net terms, the surplus will weigh up against the stimulus from the promised $31 billion in income tax cuts that will begin to be phased in from next fiscal year.The four other elements of Mr Rudd's plan are essentially supply-side solutions that are valuable but will take time to add to resources. The earliest will be the short training courses in workplace skills, and the increased child-care benefits that will enable more women to enter the workforce or work longer hours. Australians already have a good savings culture, especially after Peter Costello's superannuation changes. Putting those savings towards nation-building is the hard bit. Just creating a body called Infrastructure Australia does not in itself advance us beyond the infrastructure committee already attached to the Council of Australian Governments. Port, transport or communications projects have to be identified, then a case made for public investment.But the missing sixth element of Mr Rudd's war on inflation concerns the danger that Mr Stevens is warning us about. This is restraint in the labour market. Especially in Western Australia, this was a point that should not have been left unspoken. Depleted as their membership may be, the trade unions could get into a situation more than "eerily reminiscent" of the 1970s, and it's the responsibility of Mr Rudd and his Labor colleagues to discourage them.
© 2008 Sydney Morning Herald