Interpac Business and Migration Solutions Melbourne Australia

(26 Mar 2010)

THE two-speed global economic recovery will present challenges for policymakers, with V-shaped recoveries underway in large emerging economies, while the road to recovery in the US and Europe looks longer, Reserve Bank of Australia governor Glenn Stevens said today.

"Looking ahead, the differences in the speed of economic recovery are starting to present challenges of their own, showing up as they do in capital flows, asset valuations and exchange rates," Mr Stevens said on a conference in Sydney. "When we add to all that the looming long-term requirement for fiscal consolidation in a number of major countries, there is plenty for markets and policymakers alike to think about."

The comments on the potential problems associated with capital flows and asset valuations are the second made this week by a senior RBA official and highlight the fact that even as Australia's economy gathers momentum, the vast problems still confronting the global economy are relevant to domestic policy.

"The stabilisation of financial markets and banking systems over the past year or more is a welcome development for all of us," Mr Stevens said. "There are still difficulties to overcome for financial institutions in some key countries as a result of the depth of recessions, and these will be the subject of attention over the coming year."

Importantly for Australia, a number of its major trading partners are among the fastest growing economies. Mr Stevens said "the letter V is a reasonable description of the trajectory, to date, of important emerging countries like China, India, Brazil and a number of smaller east Asian countries". However, he warned some moderation in the pace of growth of production in some of these countries this year. "This is usually the case in V-shaped recoveries, since the initial pace of expansion is considerably higher than the long run sustainable growth rate," he said.

Australia's economy has grown quickly in the wake of the global financial crisis, helped by its close ties with Asia. Mr Stevens said challenges ahead for the global banking system in major countries remain considerable.

"The outlook for some of the remaining government ownership stakes remains unclear,” he said. "While losses coming from writedowns of securities slowed some time back, losses are still occurring in lending books as a result of the normal effects of big recessions, not least in the area of commercial property."

Banks, particularly large internationally active banks with big trading operations, will require additional capital over time under proposed changes to global prudential standards, he said. The RBA is also more advanced than other central banks in having wound back its balance sheets exposure, which increased to manage the liquidity crisis of late 2008.

"The expansion in the RBA's balance sheet was unwound nearly a year ago and the policy rate has been increased somewhat, reflecting the very different circumstances facing the Australian economy. But we are not the only country seeking to manage the return to normality," he said. "An increasing number of countries outside those most directly affected by the crisis have begun this process, though the speed of adjustment naturally depends on national conditions."

On the issue of sovereign debt concerns in the global economy, Mr Stevens said Greece accounted for only a small part of the world economy but its relevance globally is in the fact that it is part of eurozone. "Perhaps the broader significance is that the difficulties facing Greece, while unusually stark, are a reminder of the challenges facing many governments in Europe, and for that matter the United States and Britain, over the long haul," he said.

(Source from: the Australian)