Will slow and steady win the race?

Richard Katter
Economics, Strategy and Research

The RBA have today kept the target cash rate at 4.5%.

This marks three consecutive months without a move and illustrates that the hard work done early by the RBA is paying dividends. Inflation is within the Reserve Bank’s target range of 2% - 3% at a quarterly annualised rate of 2.4%, housing appears to be taking a hard earned rest and equities are bouncing along the bottom. Given we are eye-balling a medium to long term forecast for strong economic growth, we are in a fairly envious position.

Given all the banter this election campaign about Australia’s level of debt I thought I would put it in some context to see if in fact the rhetoric has some factual basis to it. The CIA’s World Fact Book reports public debt as a proportion of GDP (comparing apples with apples) for 129 countries. Australia comes in at number 108 with public debt of 17.6% of GDP. This compares to the US at number 47 with public debt of 52.9% of GDP, the UK at number 22 with debt at 68.1% of GDP and Canada at number 18 with debt at 75.4% of GDP.

This data illustrates that our debt is in fact very low and incidentally the envy of the developed world. Furthermore the OECD has forecast that our GDP growth in 2011 will be 3.6% which compares to Canada and the UK at 3.2% and the US at 2.5%.

These are the factors that are contributing to Australia being regarded as the economic best case example by the ratings agencies. We have a stable economy, with a strong robust banking system, low public debt and strong growth forecasts.

As well as the factors mentioned above, we are the best situated of all developed countries, given our geographic location and abundant natural resources, to capitalise on the long term growth forecast for Asia.

In an election year, one would expect us to be peppered with proposed nation-building projects that could guarantee our prosperity into the future. This has not been the case. Unfortunately there appears to be a bipartisan view that promoting consolidation and hand sitting (reducing our already low levels of debt) will win more votes than saying “right, we are at the cross roads here and we have the opportunity to ramp things up a bit, and take on a little more debt to deliver greater growth and prosperity into the future, by capitalising on our strengths and our great opportunities”.  Unfortunately, both 'would-be' Prime Ministers have the popular vote as their primary focus. 

We expect that rates will stay pretty flat for the next couple of months especially if, as was touted earlier in the election campaign, the banks will increase their rates post the election irrelevant of what the RBA does, due to the increasing costs faced by them as a result of the sovereign debt issues in Europe.