Reserve Bank governor Philip Lowe has predicted some of the Trump administration’s economic policies could be good for Australia and the global economy, while warning it could also turn out “very badly” if America retreats from the international order of the world.

In answers to questions following his first public address of the year, opening the A50 forum of leading international fund managers in Sydney, Dr Lowe said the RBA “was in watch and wait mode like everyone else” with the US administration. “It’s very difficult to predict how the new US administration is going to effect economic policies,” he said. “It’s quite possible that the outcomes are really good. Increased spending on infrastructure, reducing regulation, cutting corporate tax, are things that the G20 have been calling for to stimulate economic growth. “To some degree that is at the core of President Trump’s political message, if that works it could be really good for global growth.” It was these policies that Dr Lowe also urged the federal government in Australia to follow.

But he also delivered a blunt economic warning to the audience of policymakers and fund managers. “It could turn out very badly though if we do see the retreat from the open international order, the US economy would be weaker and the world economy would be weaker,” he said. “It surely can’t be the case that the way to build prosperity is to build barriers between each other.” 

In what appeared to be a swipe at developments in the United States Dr Lowe used his address to point out that Australia offered international investors “an openness and transparency not always seen elsewhere around the world”. “Australia has benefited greatly from the open international trading system,” he said. Year after year, for more than two centuries now, capital from the rest of the world has helped build our country. As investors, Australians have also benefited from being able to diversify our portfolios.”

While not commenting specifically on President Donald Trump’s migration bans that have caused turmoil in the United States and debate around the world, Dr Lowe highlighted the benefits of a dynamic migrant population to the Australian economy. “Our population has recently been growing at around 1.5 per cent a year, and around 40 per cent of us were either born overseas or have one parent born overseas,” he said. “This brings a dynamism that isn’t there in countries with stagnant and less diverse populations.”

In the address, Dr Lowe delivered an upbeat assessment of the Australian economy but implored Prime Minister Malcolm Turnbull to borrow more to spend on roads, railways and other infrastructure. Dr Lowe said while it was important for the government to rebuild its finances, that shouldn’t stop it borrowing to build the high-quality infrastructure it will need to maintain support for a growing population. “Good transport infrastructure opens up opportunities for people and opens markets. Investment in transportation infrastructure can also play an important role in addressing housing affordability,” he said. “Infrastructure investment does of course need to be paid for. The positive news here is that there is no shortage of finance for the right projects.”

His comments echo those of his predecessor Glenn Stevens, who said public investment in infrastructure could boost the economy, making the Reserve Bank’s job easier while lifting Australia’s productive capacity.

Tax cuts call

The government’s day-to-day budget would need to move closer to balance in order to give Australia headroom to deal with shocks. A “complication” was the need to make Australia’s tax system competitive. “One example of this complication is in the area of corporate tax, where there is a form of international tax competition going on in an effort to attract foreign investment,” Dr Lowe said. “Like other countries, we face the challenge of responding to this while achieving a balance between recurrent spending and fiscal revenue.”

An update of Reserve Bank forecasts released last Friday predicted economic growth of around 3 per cent in each of the next two years, boosted by a significant pick-up in liquefied natural gas exports, understood to account for around 0.5 points of growth each year, he said. The economic headwinds from the unwinding of the mining investment boom would “blow themselves out” as 90 per cent of the slide had already happened and Australia’s terms of trade had stabilised.

Housing presented a “complex picture” with investor demand strengthening and prices in Sydney and Melbourne climbing strongly, while apartment prices in other cities were falling. Although household debt was high, taken together households were “coping reasonably well”.

Article sourced from the Canberra Times via MSN Money published 10/02/2017