What economy is RBA Deputy Governor Andrew Hauser talking about?

Deputy RBA Governor Andrew Hauser used a cute horse-racing analogy to explain the Reserve Bank’s monetary policy at the UBS Australasia Conference. Unfortunately, the analogy was almost as far removed from reality as the economy he was describing.

This RBA narrative is convenient for both the government and the Bank itself, because it ignores the serious problems created by their own policies.

Hauser’s message was that Australia is in a good position – recovering and operating near full capacity – but constrained by supply. If business simply invested more and lifted productivity, we would, in his words, be “off to the races.”

But if not, he warned, we could end up like the Melbourne Cup favourite Presage Nocturne – “boxed in at the rail.”

Monetary policy in Australia faces an unusual challenge – the recovery in GDP growth began last year with a higher level of capacity utilisation than at the start of any other recovery in over 40 years. That’s a real achievement, when it comes to making full use of the economy’s available resources. But it also poses a big, and pressing, question. Could Australia find itself trapped on the economic rail like one of the riders in last week’s Cup – boxed in by its own capacity constraints? Or will it find ways to break free, through higher productivity and more investment in new capacity? If it does, we could be off to the races.

Away from the Cup fumes, here’s the economy we actually face.

Far from being in recovery, Australia has recorded declines in per-capita income for the past two financial years. The only thing keeping headline GDP positive is record levels of net immigration.

There are several reasons why the economy appears to be at full capacity – and none are cause for celebration.

One is the strain created by rapid immigration. Another is the lack of incentive for business investment: firms are running ageing plant and equipment as hard as they can, rather than expanding capacity.

The government’s announcement that our super funds will invest $1.44 trillion in the USA by 2035 is effectively an admission that there aren’t enough viable investment opportunities in Australia.

Meanwhile, business closures are rising. ACCI reports that 30 per cent of small businesses fear they may be forced to close within the next year.

The current government’s union-friendly industrial-relations changes are strangling productivity and innovation, while the Fair Work Commission is being overwhelmed by a flood of unfair-dismissal claims.