Varied rates of recovery 'a challenge'

SYDNEY: The varied pace of economic recovery around the world is starting to present challenges, with fiscal consolidation required in several major countries, the central bank says.

These differences are likely to put strains on the relative settings of macroeconomic policies and exchange rate arrangements, Reserve Bank of Australia (RBA) governor Glenn Stevens said yesterday.

"The stabilisation of financial markets and banking systems over the past year or more is a welcome development for all of us," Stevens told the ACI2010 49th World Congress in Sydney.

But he said there were still difficulties to overcome for financial institutions in some key countries as a result of the depth of recessions, and these would be the subject of attention over the coming year.

"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.

"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 policy makers alike to think about."

Stevens said US growth spurred by a swing in the inventory cycle is thought to have marked the turning point in the second half of 2009, but most observers still expect only moderate growth this year.

"In Europe, the momentum of the recovery has been less certain," Stevens said.

"In both cases the old forecasting cliche about uncertainty applies in spades."

He said it was apparent that the letter "v" was a reasonable description of the trajectory to date of important emerging countries like China, India, Brazil and a number of smaller east Asian countries.

With full employment in parts of the emerging world likely to be reached there before North America or Europe, living standards in emerging Asia could rise a bit faster than the increase in their own productivity, for a time, if they were prepared to meet some demand through imports.

"Facilitating this most efficiently would of course involve, among other things, allowing exchange rates to change," Stevens said.

"The alternative approach would be to seek to slow growth in demand in the emerging world as production there approaches full capacity, so as to maintain internal balance at a given set of exchange rates.

"But that would leave unused capacity in the industrial countries and emerging world living standards lower than they could be."

The RBA governor said these were "polar cases" and it would be open to Asia policymakers to steer some path in between.

"They have a degree of suspicion of rapid capital flows and large movements in exchange rates, which is understandable after the experiences of the late 1990s," he said.

"It is also understandable that the smaller economies, some of which are extremely open, with trade shares of more than 100 per cent of GDP, do not wish to see volatile exchange rates because it is disruptive for their economies."

Mr Stevens said the issue also involved saving and investment patterns, national policy approaches to growth and the speed at which these can be adjusted.

"The point, nonetheless, is that the current and prospective differences in economic circumstances between significant parts of the world are likely to put strains on the relative settings of macroeconomic policies and exchange rate arrangements."

"This will need careful management, by all concerned, over the next few years."

- AAP