When it comes to risk-taking, companies and other engines of economic growth remain chastened by the Global Financial Crisis (GFC). This hangover, though understandable considering the damaged psyches that inevitably resulted from suffering through a generational downturn, has caused a conundrum in the developed world.
While historically low interest rates have helped boost financial assets as well as other rate-sensitive sectors such as housing, there's little evidence yet that central banks' monetary largesse has managed to flow through to countries' overall economies. Like many of its peers, Australia is experiencing the same phenomenon.
To be sure, it can take at least a year and a half, if not longer, for lower rates to spur growth in other sectors.
But it's now been nearly three years since the Reserve Bank of Australia (RBA) began its current rate-cutting cycle, bringing its benchmark cash rate to an all-time low of 2.5 percent last August. And the country's unemployment rate just hit 6.4 percent, its highest level since 2002.
At the same time, we should note that private-sector economists forecast that the country's economy will expand by 3.1 percent this year, which is downright robust compared to projections that the US economy will grow by just 2 percent.
And, of course, Australia has enjoyed 23 consecutive years without a recession, which likely makes the country's central bank the envy of its peers.
But while these two points are meant to dispel some of the worries of the alarmists, the task remains for both politicians and policymakers to do what is necessary to help the country's non-mining sectors find new growth.
Even so, when we note the peak in mining investment is past, that doesn't mean the resource space is down for the count. Indeed, many of the projects that were initiated during the ramp-up phase are finally about to commence production. So mining will obviously remain a key part of the economy even if it's no longer driving growth.
In the past, we've written about how RBA Governor Glenn Stevens has lamented the subdued "animal spirits" among the usual risk takers in both Australia as well as the global economy.
In previous remarks, Stevens has noted the obvious shortcomings of even extraordinarily accommodative monetary policy and advocated for greater coordination among the G-20, a group of the world's 20 major economies, in pursuit of regulatory and structural reforms, as well as free-trade agreements that actually embody the principles their name suggests.
This week, Stevens turned his attention toward domestic politics. In his three-hour testimony before the economics committee of Australia's House of Representatives, Stevens put a colorful spin on the limits of monetary easing: "I have allowed the horse to come to the water of cheap funding. I cannot make it drink," he observed.
He then implored politicians to pursue the sort of policymaking that could help reinvigorate the animal spirits that will drive the country's economy. "I think it is a question for legislatures, governments and political leadership on all sides to think about what conduct, what measures and what ways of doing things help to create that confidence," he said according to The Australian.
In noting that low rates have done all they could do, Stevens also essentially implied that still-lower rates are not a possibility, at least for now. He also dismissed directly intervening in the exchange rate, though he has in the past mentioned that he's "open-minded" about such an effort.
So the central bank is attempting to hand the baton off to Australia's politicians.
While Prime Minister Tony Abbott's Liberal-National government has certainly made some noteworthy achievements in laying the foundation for future growth, such as in expediting free-trade agreements with key trading partners, it's also shown a fixation on austerity measures that seems unusual given where the country is at in its economic cycle.
That resulted in a contentious federal budget that at least temporarily contributed toward dampening consumer sentiment.
Even though the RBA's cash rate is at an all-time low, it's still substantially higher than equivalent benchmark rates among its developed-world counterparts. So if the country's economy does take a more worrisome turn, then the RBA still has ample room to lower rates even further.
This article originally appeared in the Down Under Digest column. Never miss an issue. Sign up to receive Down Under Digest by email.
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