Roaring Twenties or a decade-long economic slump? RBA says it’s up to us

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The Reserve Bank is looking at its economic forecasts and is all too aware economic conditions could go either way: boom times or bust.

Of course, a third option is that the economy hums along.

But this option achieves little by way of economic or wage growth.

It’s also a throw-back to how the economy looked before the pandemic.

“Investment was low, productivity growth was lagging and many of the behaviours we associate with business dynamism were on the decline,” Reserve Bank assistant governor Luci Ellis said in a speech to the Committee for the Economic Development of Australia.

The Reserve Bank is now looking for something to fire up the economic engines.

RBA governor Philip Lowe began beating the “animal spirits” drum many years ago.

That is, he wanted businesses to throw caution to the wind and invest and hire.

That, he said, would fire up the engines of growth.

Whether or not there were any animal spirits, who knows, but it didn’t work.

Luci Ellis is now stepping up with the megaphone.

She wants “dynamism”

What is that?

Ms Ellis defines it as, “the drive to innovate, adapt and evolve — [which] helps underpin a society’s living standards.”

She believes if there was ever a time for the economy to “evolve”, it’s now.

She wants “adaptation, innovation and dynamism, and [to look at] how the experience of the pandemic might have changed things.”

The key challenge facing the economy in the wake of the height of the mining boom was that other parts of the economy seemed to be sleepwalking, she said.

“Even after the mining investment boom ended, non-mining business investment showed little sign of coming back.”

It lead, she argued, to a sluggish and uninspired economy with “less investment, less job and firm turnover and less productivity growth.”

“They also might connect to some of the other patterns in the economy in the lead-up to the pandemic — low inflation, slow growth in wages and a sense that very low interest rates were needed to stimulate demand, in order to attain decent rates of economic growth.”

What is the Reserve Bank’s chief economist looking for, specifically?

She wants to see hungry and talented entrepreneurs researching, experimenting with new business ideas and discovering and innovating.

“Business entry is an important part of dynamism because new firms are often innovators. Start-ups are seen as the firms with new ideas, new products and new investment.”

Ms Ellis sees risk for businesses who embark down this path, but the reward or pay-off, she believes, is also there.

“Demand is bouncing back strongly, supported by policy.

“Shifts in demand between goods and services have opened up some industry-specific business opportunities, including for new firms.

“Meanwhile, financial sectors globally are in good shape. Business sectors are also in much better financial shape than they were after the GFC.

“Profits have recovered quickly, and fiscal support has meant that some firms are considerably more cashed up than before,” Ms Ellis noted.

The theme of the speech was that opportunities for businesses are now presenting themselves — whether they be in research or innovation, or investment and business is supported now more than ever by loose economic policy.

She concluded her speech by reminding businesses, big and small that, “in the dynamic realm of business, innovation and investment … it is more a case of nothing ventured, nothing gained.”

That’s true.

Retirees renting face poverty

It’s also worth considering that Luci Ellis told a parliamentary committee earlier this week those who don’t own a home in retirement face poverty.

She also conceded children of parents who rent will find it harder to enter the property market.

So there are clearly many younger Australians who do not have anything by way of wealth now and may not gather any by retirement.

Her call for business bosses to adapt and embrace dynamism has merit, but consumers make up well over half of all economic growth — and, combined with low wage growth — they’re trying to survive … let alone thrive.

Do we need to look at that problem first?

Business reporter David Taylor (Original ABC Article)