Glenn Stevens: economic possibilities of the future

The Reserve Bank governor talked interest rates, the Australian dollar and the economic possibilities of the future to the annual CEDA dinner in Melbourne.

My first venture to your gathering in 2006 talked about the role of finance in economic development. An important part of the story was that, through history, financial development and innovation went hand in hand with the extraordinary growth in living standards that flowed from the industrial revolution. Another part was that financial development did not come without its risks, which on various occasions in history had materialised in damaging, or even devastating, fashion. In 2006 we were talking, among other things, about the rise in debt of Australian households and the various risks that might accompany that. We had had a ‘stress test’ focused on such issues, conducted as part of the International Monetary Fund’s Financial Sector Assessment Program. The results had been pretty good actually, but we were not sure how reassured we should be by them. And we talked about an increase in risk-taking in certain parts of the corporate sector that was occurring at the time, and wondered how that would all turn out.

We didn’t have to wait long for answers to those questions. The next time I came to CEDA in 2008 the global financial crisis had erupted and the global economy and financial system were facing their darkest moments since the 1930s. The G20 Leaders had just met in Washington and taken the first steps towards putting the global financial system back on a sound footing.

By then economic growth in Australia had already begun to moderate, but we feared a much more significant slowing could be in prospect. Confidence was shaken and, understandably, households and businesses became much more cautious about spending, taking on more debt, or investing in a new process or idea. The deteriorating global outlook also led to large declines in asset prices and the prices of commodities important for Australia. The feeling at the time was that the terms of trade, which had risen substantially as prices for minerals and energy had reached very high levels, had probably peaked. The falling terms of trade were expected to subtract noticeably from growth in national income over the subsequent period.

It’s a matter of record that, due to a combination of factors, Australia’s economy and its financial system came through that real-life ‘stress test’ remarkably well, all things considered. And, as it turned out, the boom in our terms of trade had further — a lot further — to run.

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