Australia needs buffers to prepare for economic shocks

Despite economic uncertainty, Australians and business should not withdraw from the world, but must ensure the country has buffers in place to deal with future shocks, Reserve Bank of Australia Governor, Philip Lowe told a CEDA audience in Melbourne.

Mr Lowe’s presentation at CEDA’s end of year annual dinner, titled Buffers and Options, focused on managing risk and ensuring resilience in Australia’s economy.

“Australia's economic success over recent decades reflects both the underlying fundamentals and our ability to ride out various shocks. The fundamentals that have helped us are well known,” he said.

“They include our openness to trade and investment, our generally favourable demographics, our diverse and talented people, our abundance of natural resources, our ability to undertake structural reform to boost productivity and our links with the fast-growing Asian region.

“But also important to our prosperity is the fact that over the past quarter of a century, our economy has not been seriously derailed by economic shocks.

“After all, nothing undermines prosperity like a severe recession in which large numbers of people lose their jobs and see their wealth decline.”

Mr Lowe said that while Australia has faced economic shocks, such as the Asian crisis, the bust of the US tech boom and the Global Financial Crisis, the country’s buffers have prevented large-scale impacts on the economy and Australian citizens.

“When the shocks hit we have had buffers to absorb them. Because of these buffers, we had options that not all other countries have had,” he said.

He listed these buffers as: the flexibility of Australia’s exchange rate, monetary policy, the labour market and avoiding the build-up of large financial imbalances.

Mr Lowe said business is once again in uncertain times from factors that include rapid technological change, Australia’s high debt levels, and the global monetary expansion.

However, he said it is not a time to pause or retreat.

“When people feel uncertain, they sometimes feel that it's best to delay making decisions, especially if those decisions are difficult to reverse,” he said.

“In my view, despite the uncertainties, we should still be looking forward to the future with some optimism.

“We obviously can't ignore the uncertainties. But neither can we let those uncertainties force us to retreat, to withdraw from the world. If we do this, then we, and our children, will be poorer as a result.

“Rather, we need to deal with, and prepare for, those uncertainties.”

Mr Lowe said these buffers fell into three areas: the financial system, the fiscal arena and household finances.

To hear Mr Lowe discuss these three buffer areas in detail, watch the video embedded below.