Glenn Stevens: break infrastructure deadlock to create long-term growth

A steady pipeline of government infrastructure spending is the key to long-term growth in Australia’s economy, says RBA governor Glenn Stevens, as opposed to a boom and bust approach. Impediments are not financial but political.

In the last two years, the economy has gone from an estimated growth of about 2.5% to just shy of 2.5%. Underlying inflation then was 2.25-2.5%, consistent with the target of 2–3%, and two years on the economy is growing at just shy of 2.5% and underlying inflation is around 2.25–2.5%, consistent with the target.

In some respects, then, it might seem that not much has changed. In fact a number of important developments have occurred during that period, some as anticipated and some not. Overall, the fact that not much has changed is disappointing: the economy has not picked up speed as we had hoped.

The Australian Economy

In Australia, recent growth in the economy has not been as strong as we want. Of course, what we are witnessing is not an economy heading along the course of a normal economic cycle, but a complex and rather lengthy adjustment both to the once-in-a-century cycle in our terms of trade and an earlier increase in household leverage. During the late 1990s and early 2000s, very confident households spent and borrowed more, and saved less, in the process extending their balance sheets. That process started to fade in about 2006 and then finished more abruptly when the financial crisis hit. But by then the run-up in resources prices was imparting a very large stimulus to the economy and allowed for solid growth to continue at a time when most other countries were still feeling the aftermath of the financial crisis.

But now most of 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 (and perhaps accelerate).

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