Australia is in the early stages of an historic adjustment downwards in its income growth as the terms of trade fall....
The problem Pascoe is identifying is that by definition in a current account deficit country when the public sector runs a surplus (or smaller deficit) then the private sector must run a larger deficit to offset it or growth will fall. That is, the private sector will have to borrow more (or sell more assets).
That might be OK, a return to the Howard/Costello growth model as it were, but our situation is actually worse than Pascoe is arguing. Credit growth is not at such low levels entirely by choice. It is kept low because APRA insists that all new loans are funded by deposits. This limits credit distribution (not price) by driving up credit standards. This in turn is the result of Australian banks no longer being able to borrow money endlessly offshore or they will have their credit ratings stripped. We are, in fact, in a slowly tightening current account squeeze.
This is the vice that I have described for the Australian economy for the past five years. Private credit cannot grow too fast lest it threaten the banks’ credit ratings. Public credit cannot rise too fast because it will threaten the national credit rating which still guarantees the bank ratings. Yet you can’t cut back too fast on either lest growth plunges. We’ve been supported through it so far by massive growth in the external sector (the mining boom) but that is ending.
This election should be about this: which party offers the best path forward out of the trap. The right solution will look something like this:
- a huge productivity drive
- modest public deficits aimed very much at productivity boosting soft and hard infrastructure
- private sector disleveraging and probable deleveraging
- above all, measures to lower the dollar and boost tradables growth without firing up greater credit growth