New challenges for RBA in new global environment

A unique set of circumstances has put the Australian economy in a vastly different situation to economies in the rest of the developed world in the emergence from the global financial crisis (GFC), according to Deutsche Bank Australia chief economist Adam Boynton.

Speaking at Friday’s Deutsche Asset Management conference in Sydney, Boynton said Australia compared closely to Brazil in sitting on the favourable end of a global price shock in iron ore prices.

There were also some important microeconomic differences between the housing markets in Australia and the US, he said.

Because interest payments in Australia aren’t tax deductible, an owner-occupier with a mortgage rate of 7 per cent and a hypothetical income tax rate of 50 per cent would need to find a pre-tax risk-free rate of return of 14 per cent on any other investment to get a better outcome than paying your mortgage back.

This means that, by pure luck, Australians have been incentivised to pay their mortgages off more rapidly, meaning we had far lower levels of housing debt compared to the US when the GFC hit.

“We ended up with a microeconomic structure in the housing market that makes you somewhat optimistic that the sort of cataclysmic adjustment that occurred elsewhere should not occur here, and you get this continuation of the long slow decline,” Boynton said.

The policy now for Australia’s central bank has changed from dealing with the GFC to ensuring the handover from public to private demand.

“The emerging challenge for the RBA is dealing with an economy with an unemployment rate in the low fives that’s growing around trend or above trend, in a world where the global economy is still supporting us,” he said.