Speaking at the Morningstar Investment Conference yesterday, Mr McKibbin said that it is a mistake in fiscal policy to cut interest rates in the wake of the mining downturn, and that it doesn’t address structural issues in the global economy.
“The argument is that we should be cutting interest rates and letting the rest of the economy grow so that the mining boom withdraws, we have the resources and enough strength in the economy to fill the hole,” Mr McKibbin said.
“I think that is the wrong way to think about policy. You don’t solve the structural problems that Australia is being affected by and that the rest of the world is also experiencing by cutting interest rates to zero.”
Mr McKibbin said that the global economy is experiencing “very major structural shocks” as a result of booming emerging economies, which are changing production and consumptions globally.
With the US investment into shale gas predicted to boom, Mr McKibbin said that Australia’s resources sector would be affected, with it likely to lead to a greater substitution out of coal within the energy sector.
He said this discovery of gas would drive down the price of coal and reduce Australia’s terms of trade by eight per cent over the next few years.
“That’s quite a big negative shock and it will take its toll on the Australian dollar,” Mr McKibbin said.
“It’s not that the whole resources boom is coming to an end because we have longer term capacity to produce this stuff and to sell it to the rest of the world, but the demands the short-term investment boom has on our gross domestic product are going to be disappearing over time.”
