Speech Summary The Long Run
Address to the Australian Business Economists (ABE) Annual Dinner
The speech starts by looking at near-term forecasts for the Australian economy, including the Reserve Bank's projections in its November Statement on Monetary Policy. It then moves on to consider the nature of economic forecasting and the way that they are used. It highlights particularly their inherently imprecise and qualitative nature and indicates that in order to emphasise their probabilistic nature, the Bank now displays its forecasts in ‘fan charts’.
In this context, the speech then suggests that, for policymakers, it is not whether economic forecasts are accurate, but whether the big forces at work in the economy are recognised and understood. It goes on to describe the forces currently at work as including: (for Australia) the ongoing adjustment to the significant rise and more recent fall in the terms of trade; globally, the ongoing moderate economic growth as the legacies of the financial crisis continue to be digested; disinflationary or deflationary environments for goods and commodities and accompanying low wage growth; low returns on safe financial assets; and relatedly, high and rising valuations on existing assets but low levels of new capital formation. The potential impact of ‘digital’ disruption on the course of the economy is also noted.
Moving to consider the longer run, the speech considers whether forecasters a decade previously had foreseen the economic trends that have emerged. It suggests that ‘global imbalances’ were the most discussed risk; that changes in household saving and borrowing had been recognised; and that there was a sense of the emergence of China as an important economic force for the Australian and global economies. But it notes that there was ‘celebration’ about the ‘great moderation’ in macroeconomic volatility, with only a few people worrying about whether complacency about financial risks in that environment might threaten it. And it highlights that Japan was suffering deflation and undertaking unconventional monetary policy, with few, if any, observers imagining that effectively-zero policy rates and quantitative easing would be seen across all of the major jurisdictions in the 2000s.
One area of work that the speech picks out as having been a focus of good long-term thinking ten years ago is the consideration of the economic effects of population ageing. But it goes on to suggest that the influence of demography is ‘routinely ignored’ in consideration of the economic outlook when, in fact, it may be that demography is a common factor behind some of the most important ‘big force’ developments in an economy.
The speech concludes by making some predictions about the ‘big forces’ that might come to bear over the next decade. It notes particularly the difficulties that are going to be faced by the interaction of an ageing population and its need for retirement income with the likely continuation of low levels of global interest rates.