While AFR monetary enthusiasts like Chris Joye and David Bassanese continue to cheer the efficacy of interest rate cuts, an interview with Woolies and Fletcher building chairman, Ralph Waters, finally canvasses the unthinkable at the national business daily, that rate cuts just aren’t going to work this time. Waters says yesterday’s cut will do nothing and that the stimulus of 2009 only delayed the inevitable:
“I’m not saying that [the stimulus] was the wrong thing to do or what was the better thing to do. We haven’t had a recession, life hasn’t gotten too bad, so on balance, it’s pretty hard to criticise. But equally, it’s pretty hard to be surprised we are going through our dull moment. Australia avoided [a recession] but you can’t do that forever and eventually we all have to have our moment. The difference in our moment is we are paying the debt and interest we tried to run up to avoid this.”
Waters endorses building more houses but reckons manufacturing it toast:
“The housing starts for so long have been so far below underlying demand that commonsense says that somewhere soon . . . we’ll have to start building houses. [Manufacturing] businesses are in tremendous stress and not one is going to get through a tough year with a few interest rate cuts. They’re going to be gone. When we have a dollar where it is and wage rates this high, no I don’t have much faith that many of those are going to be around. It’s not the end of the world; it’s just shifting and structural change.”
That’s it in a nut shell. Although I am less sanguine about the outcome. Building more houses will not come so easily, in my view. Nor, in the end, will it be a sustainable growth driver. In the post GFC world you must earn your way not borrow your way. What is more likely is that as we pass through our reckoning – the slowing of income and speeding up of productivity growth – bad loans plus regulatory and investor caution will steadily clog up the banking system and housing credit will become more difficult to obtain. Asset prices will continue to deflate and unemployment, as well as the number of folks per household, will rise (as opposed to building more houses). The public surplus will be a distant memory. Eventually the dollar will have wrought enough damage too that it will fall. At that point we will again be competitive.
You can thank LNG that it won’t happen overnight. But it will happen. It’s happening already.
