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What is happening to policy?

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« 1 Η.ο"Γ» M edia R elease 118/91 8 May 1991


It is hard to get a clear statement of economic policy direction from either Labor Leader at this time.

As the Prime Minister and the Treasurer wander the corridors counting the numbers, both are assuring their respective supporters that they "feel a recovery coming on".

But what will drive that recovery with real interest rates still running at 6 to 8 per cent?

Dwelling, construction and stock-building, we are told.

But what about the other 90 + per cent of the economy?

On that we hear nothing.

One factor in that silence is that their respective economic forecasting gurus are conducting the mother of all forecasting battles.

The Reserve Bank, being closer to the financial action, is concerned that the outlook is worse than currently foreseen.

But the model-driven forecasters in Canberra are looking at a series of indicators foreshadowing a recovery is at hand.

The question is whether these traditional models (using data based on recent history) will give reasonable answers in an environment of high debt and sustained deflationary monetary policies. In other words, is this "just another downturn" or is

it entirely different to anything we have seen in the last 60 years?

That is why the Reserve Bank is understandably concerned about what is happening to the capacity of the banking system to

finance recovery as it faces up to the need to write off further large bad debts in the wake of Adsteam and other misadventures.

And both camps are looking abroad to the G7 stand-off between US Treasury Secretary Brady, who sees a need for interest rates to come down substantially to try to pump up the world economy and asset prices, and Bundesbank President Pohl who dismisses such arguments.

And to the growing concern, reflected in the latest ABARE

forecasts, that drought will impact on rural output.

What will they resolve?



v v , · - ·

The Government is trying to hold the line on interest rates, not because they really have a new found faith in tackling inflation but because they wish to believe Paul Keating's scenario that the economic cycle will coincide with the political cycle (as he enunciated in his EPAC Speech).

That is why short-term rates have come down less in Australia than in some other recessed countries since the beginning of January. For example, 90 day rates have fallen by about:-- 250 pts in the U.K.

- 200 pts in New Zealand - 200 pts in Canada

- 140 pts in the U.S.A.

- 70 pts in Japan

- 30 pts in Japan

- 30 pts in Germany

The Keating thesis runs that by holding rates higher for a time in the middle of the current electoral term, he will have scope to lower rates in the months ahead with a view to pumping up the economy again in the second half of 1992, along with a

traditional Labor Budget, prior to the next election.

That is the reason why he will not commit to a medium-term

objective of price stability.

But this approach has lent strength to the Australian dollar and led to a skirmish in Cabinet with his Cabinet colleagues about the impact of an uncompetitive exchange rate on the economic recovery.

It has also led to added strain on the financial system and other debtors.

But the tensions are building.

If the employment numbers over the next couple of months and developments abroad do not support "the Keating thesis" we can expect yet another "U-turn", with interest rates brought down sharply and a Budget which bows to the calls of the Left for more public spending and public ownership. And along with that outcome, the usual spate of Keating ex-post rationalisations.

So Mr Keating is flying by the seat of his pants again as he

tries to manipulate the economic cycle to fit his election timetable .

And that is why nobody can get a clear statement of economic policy direction from the Government.