Speech Summary Fundamentals and Flexibility
CFA Institute Australia Investment Conference
The speech starts with the central message that the fundamentals of the Australian economy are strong and that they provide a basis to be optimistic about the future. It then highlights the importance of flexibility if we are to use those fundamentals to their best advantage.
The speech sets out data showing that Australians enjoyed very strong growth in average living standards over the past couple of decades, but that, since 2008, declines in the terms of trade and in share of the population in employment have resulted in very little growth in real income per capita. In this context, it highlights the important role that productivity growth is likely to play in future increases in living standards in Australia.
The speech lists five key fundamentals that should stand Australia in good stead: a strong institutional framework (including the rule of law, respect for property rights, a well-functioning public administration, and a well-established regulatory system); our people, who are diverse, well educated, have a ‘can do’ mentality and a demonstrated capability for adjusting to change; a large endowment of mineral resources; large tracts of agricultural land and an ability to produce high-quality clean food; and an established services industry with the potential for considerable expansion as average incomes in Asia rise.
The speech then moves onto the importance of flexibility, particularly in the face of advances in technology and shifts in the global economy. It suggests that there is no single policy lever called ‘flexibility’ or ‘adaptability’ but that they are the result of the accumulation of numerous decisions and policies across many areas. In the area directly related to the central bank, it argues that Australia's floating exchange rate has been the single most stabilising influence on the economy over the past three decades; helping the economy absorb very large global shocks including the upswing and now the wind-down in mining investment. It also notes the important role that the finance industry plays in funding innovation. However, the speech recognises that most of the areas that affect the flexibility of the economy lie beyond the world of central banks and finance. It posits that these fall into four key areas: the competitive environment; the incentives for innovation; the labour market; and the education system.
The speech concludes that, while the Bank has an important role in ensuring the stability of Australia's overall economy and financial system, it is unlikely that the rate at which living standards improve will be driven by its actions. Instead, it stresses that the improvement in living standards rests on the country's ability to develop its fundamentals and to enhance flexibility so that it can take full advantage of the opportunities that arise.