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Government beware… Australian bubble could burst
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16th May 2006 
 
 
The Australian economy is at a similar stage of the business cycle to where it was prior to each of the past four recessions according to Saul Eslake, Chief Economist at ANZ, who presented at the Chartered Accountants Business Forum this week.  
 
Mr Eslake said Australia has enjoyed the longest run of uninterrupted economic growth since Federation and pointed out that the economy is now operating at close to full employment of labour and capital - however he warned that this could all come to an end if the Government repeated the same mistakes it had historically made.  
 
“The economy is near the point in the cycle where the seeds of previous recessions have been sown - seemingly everything looks rosy. Despite the fact it looks good, it is dangerously reflecting the economy as it was before each of the past four recessions. Those being in 1960, 1981 and 1989 ”, Mr Eslake said.  
 
He went on to warn that three Government policy mistakes have traditionally been made at this stage of the business cycle:  

  1. Allowing wages to grow faster than justified by productivity in a tight labour market;
    2.  
  2. Failing to allow the Reserve Bank to raise interest rates before inflation has begun to accelerate; and
    3.  
  3. Not running big enough budget surpluses by ‘giving away’ too much in the form of tax cuts and increased spending.
 
Mr Eslake said it was most unlikely that the first two mistakes would be repeated, but there was a real risk of repeating the third mistake - of ‘giving away too much’ of the fruits of the boom at the peak of the cycle.  
 
While Australia had enjoyed 15-years of sustained economic growth he also warned that there are now visible constraints preventing the country from being able to sustain its current level of growth.  
 
“Upward pressure on costs and prices is starting to emerge in some places, the Reserve Bank thinks that inflationary pressures are increasing, Australia’s productivity performance has been deteriorating and consumer spending, which was previously the main driver of growth, has slowed,” he said.  
 
“Australian economic growth is fortunately being sustained by the China-driven surge in the terms of trade, to illustrate my point the terms of trade gains since 1999 have been worth $2,606 pa to each Australian on average.  
 
Focusing on international markets, Mr Eslake said the world economy has continued to do remarkably against a backdrop of elevated oil prices due to increase demand from China and other developing economies. However he warned that there are some significant global risks which Australian businesses should be aware.  
 
In particular, the accumulation of large surpluses in oil producing nations coupled with the withdrawal of liquidity by global central banks could result in instability in the currently stable global market.  
 
“Higher oil prices are leading to some potentially significant shifts in current account balances and looking forward we expect to see oil-producing nations running large current account surpluses over the next few years,” Mr Eslake said.  
 
“US interest rates have been rising since mid-2004 and rates are now rising in other regions, major central banks are also now turning down the liquidity taps and Government bond yields have risen in all the world’s major financial center - yet alarmingly the financial markets haven’t really made any allowance for increased risk”  
 
Saul Eslake is available for further comment on 0413 987 231.  
 
Alternatively, please contact Rebbecca Stewart on 0410 151 931 to arrange an interview or to access further information.