Overview of poll results by Professor Rodney Maddock
By Professor Rodney Maddock, Australian Centre for Financial Studies
Economists see less risk from downturn
The most recent Economic Society survey of leading Australian economists throws up some important challenges to financial market commentary. Broadly leading economists see the current slow credit growth as having little to do with the Royal Commission. Even more they see the cleaning up of lending as being a significant positive for the economy in the medium term.
Most economists agree a credit contraction is underway. It is mainly driven by regulatory decisions and the business cycle, but as Fabrizio Carmignani writes “I do not think that the Royal Commission is the main factor driving this credit crunch".
There is broad agreement that Commission is likely to have some further cooling effect onlending by the major banks. Geoffrey Kingston answers that “Yes, there is indeed a risk of reduced bank credit. In particular, the banks will be wary about class-action litigation, and stricter court interpretations of the responsible-lending laws”. Nevertheless it is a guarded view. Janine Dixon illustrates this caution when she says that “It's possible that credit will become less readily available as a first round effect".
But there are a lot of potential offsets. Banks are not the only lenders in town: non-bank lending will rise to help offset any shortfall. Monetary policy can also help offset some of the downside by keeping rates lower for longer. And a lower currency will also help stimulate local activity. Some economists are even sceptical about whether the banks will really change behaviour at all. The key message is that focussing on the major banks in isolation will lead to excessive pessimism.
In effect, economists are much less convinced than market commentators that a severe downturn is probable.
Looking a little further out, most economists believe that better quality bank lending will be good for the economy. As Gigi Foster writes “[this] is far, far more economically important in the medium and longer run than the credit tightening that the banks are talking about”.
Uwe Dulleck puts it clearly: “If currently the banking system is inefficient … then getting this right may have a lot more benefits than costs to the economy. A more efficient banking system may even balance out the assumed drop in credit availability”.
Saul Eslake also reminds us that the lending to business has hardly been discussed in the Commission and is likely to be unaffected whatever happens.
As always markets jump at shadows. If there is a demand for funding, funds will find their way there. A more efficient set of institutions will channel the funds more efficiently to people and firms that can make the best of them. Australian economic growth is solid and likely to remain so regardless of what the Royal Commission recommends.