What does this mean for business?
Businesses need to think beyond the short term when planning their investment decisions. Just because a state is booming today, doesn’t mean those conditions are sustainable, especially if part of the boom is being caused by artificial monetary stimulus.
Over the longer term, booms caused by excessively loose monetary policy can lead to instability and slower growth. NSW may ultimately face a period of flat (if not falling) house prices, softer construction activity and slowing consumer spending. The eventual slowdown will be all the more severe thanks to the artificial ‘sugar hit’ of low interest rates. And when the slowdown begins, the RBA may not be in a position to cut interest rates (because rates are already very low), and if anything, may need to raise interest rates as the weak mining states begin to emerge from their trough.
Of course, different industries will be impacted in different ways as this cycle unfolds (click for more information).
What does this mean for governments?
Of course, the problem of one-size-fits-all monetary policy is not unique to Australia. In the United States, economic conditions have frequently differed dramatically across regions. The Federal Reserve does not set different monetary policies for different parts of the country. Similarly, the European Central Bank sets monetary policy for nations as diverse as Germany and Greece.
Governments should work to ensure that their non-monetary policy levers contribute to rebalancing divergent regional economies. In Australia the Commonwealth government should use the budget to help to smooth regional economic shocks. And it must work to improve inter-state mobility of labour and capital by harmonising regulation and reducing barriers to inter-state movement of workers.
The implication for state governments is that they must play a more active role in the economy. In particular state governments should consider leaning against the wind of monetary policy: if monetary policy is too lax (as it may be in NSW) then the NSW government should consider countercyclical policies to ensure that growth is sustainable.
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