ANZ CEO Mike Smith calls for bold federal economic reforms

The Gillard government must consider bold economic reform and avoid over-regulation to ensure growth rates are maintained, ANZ’s CEO says.

“Despite Asia’s economic growth engine, we need to remember that for the last two years we have been riding the wave of billions of dollars of stimulus spending,” ANZ chief executive Mike Smith told a business lunch in Melbourne.

“To be blunt, without a renewed commitment to bold economic reform and productivity improvements, Australia’s current growth rates will simply not be sustained.”

The Australian economy avoided recession during the latest global economic downturn and, unlike so many other advanced economies, is enjoying low unemployment and solid growth rates thanks in part to its links to Asia and strong demand from the region for its commodities, including iron ore and coal.

While there’s reason to think the worst of the financial crisis is over, Mr Smith noted that international conditions remain fragile and urged governments globally to avoid protectionist policy.

“Right now we are in a financially and politically unbalanced world and the outlook is quite uncertain. The US and European economies are continuing to demonstrate just how fragile they are, while Asia continues to grow,” he said.

Recent talk of what some have described as “currency wars” reflects the need for both the emerging and advanced economies to recalibrate policies, Mr Smith said.

“Re-balancing global growth requires the US to keep up its newfound interest in saving more and China needs to keep creating reasons for its consumers to spend more — although not for the moment on property.”

“At the same time, the growing tide of protectionist rhetoric — particularly in the US where even the traditionally free-market Republicans are getting in touch with their inner populist–risks drawing governments into impulsive, uncoordinated and ultimately counter-productive responses,” he said.

“We need to remember that globalisation and free trade has underpinned economic growth and prosperity for 60 years.”

For Australia, Mr Smith said it is important to remember that Asia is not just a China story, noting linkages with South Korea, Japan and India are deepening and emerging economies such as Vietnam and Indonesia will become increasingly important.

ANZ, Australia’s fourth biggest bank by market capitalisation, is seeking to leverage Australia’s deepening ties around the Asia by expanding in the region, giving it access to the vast savings pools in Asia.

Under Mr Smith’s plan to transform ANZ into a “super-regional” bank, ANZ bought branches around Asia from RBS. It is also conducting due diligence on a majority stake in Korea Exchange Bank.

Mr Smith, who is set to travel to South Korea this weekend to take part in the Korea-Australia Economic Dialogue, said the Australian dollar is likely to remain strong against its US counterpart for a while yet.

He said the Australian dollar was unlikely to head back towards US85 cents soon, with demand for the nation’s commodities and the interest rate among differential key factors for the Australian dollar’s strength.

Mr Smith expects US interest rates to remain about zero for another 12-24 months.

He reiterated that Australian banks are likely to increase lending rates over time as the cost of wholesale funding continues to rise.

He also said there were no major signs of stress in the lender’s mortgage book, although he acknowledged there was an affordability issue at the lower end of the Australian home market.