Transcript of Question & Answer Session The Resources Boom and the Australian Dollar

Question about the outlook for business investment.

I was just going to add a couple of brief thoughts. I think the outlook for non-mining business investment, it is an important source of uncertainty. It's been quite subdued; we expect that to remain the case this year. But we do see there's reasonable prospects of it gradually picking up from around next year, supported by the things we've just heard about, low interest rates. I think the lower exchange rate if it's sustained, the lower exchange rate since last year, that also should help activity I think in the traded sector. And strong population growth – we often forget about that – that's pretty strong and likely to continue for at least a while and I think that eats in pretty quickly to what spare capacity you might have. And then the confidence has been something of a missing ingredient on the business front. But I look at some of the recent surveys and they're fairly recent, but they have shown signs of an in improvement in business sentiment more generally, so if that's sustained that should be a good thing. And then, look, the labour market, its weak, the numbers yesterday confirmed that. I wouldn't get over excited about one particular month's worth of numbers. Not – so what happened wasn't really out of line with what we'd been expecting, we keep saying we think the unemployment rate will edge up for a bit longer while growth remains below trend, but it tends to be a bit of a lagging indicator and I think we should remember that. It tends to lag activity by something – by a few quarters at least, anyway.

Thanks Chris.

I guess to the panel, first of all, animal spirits certainly have lifted stock markets and asset prices generally; it remains to be seen whether the accommodative monetary policies around the world have done much for activity. The second thing I was going to say is that if you take the average business cycle of being between four and six years, we're now five years into this recovery, how much more do you think we've got to go?

If we're looking at the US I think it's an unusual business cycle; we haven't seen or have any historical example of what the US has done in the last five years. The last time we saw an event of similar sort of macro and financial dimensions was obviously in the 1930s. The policy response was vastly different and therefore the economic outcomes were vastly different. But because of that we haven't got much evidence of what this period should look like, and my suspicion is that the way that the central bank in particular, but also the government provided stimulus while at the same time encouraging adjustment, particularly, which I think has been phenomenal which people should never overlook the degree of deleveraging the US consumer has done in the last five years, may well elongate it. So our expectation is that the US economic upswing is only really just getting traction.

Another way to think about that from a cyclical point of view is to look at the housing market, it's only really now starting to lift from a construction side. Prices have been going up for a few years but construction is only now starting to move. So I think that we're going to see at least another two or three years before we have a turn in the US cycle and I think that fits with sort of the current broad market expectation for interest rates, that is, that the Federal funds rate isn't going to go up for a couple more years and so that suggests that it won't reach a peak for a few years after that.

So, why would that view be wrong, why wouldn't we – why should we expect three years of uplift of US activity which hopefully can underpin the world is if there is some sort of shock, but I think the natural cycle isn't there. The other thing to bear in mind is the short term cycles historically in many of these economies, sort of the four, five, six-year cycles, not recession – not ones that define recession but the shorter ones – are often inventory cycles and we just had a little mini one in the last little while where inventories built up and now they're being run down. So – but there's so many different forces at work that it's created – you know the US has actually just been this sort of soft, driving but, you know, gradually driving recovery, so I'm quite optimistic we've got a few years ahead.

And here in Australia I think the mining investment story has completely muddied the waters around cycles and again I think we're only at the start of the – what I'd call a traditional cycle, that is a lift in the non-mining sector.

Chris.

I'll just add very briefly, I mean I think at least in terms of thinking about the recovery from the GFC offshore, the critical thing is after a financial crisis you need to rebuild your balance sheets and that takes quite a lot of time, that's why you don't just get a normal cyclical recovery. That process occurred faster in the US, we're seeing it in the US in terms of both business and household balance sheets in much better shape – households helped by a rise in house prices. It started later, it started slower in Europe but there, even there, their economy is gradually improving but very weak. And then of course what happened through that process is the public sector balance sheet was used to provide support one way or another to the economy and financial systems there and that's – rebuilding those is going to take much more time one imagines.