By Greg Peel

"I'm sure people are sick of hearing me say," said Glenn Stevens at the Anika Foundation address in Sydney yesterday, "Australia is in the midst of a once-in-a-century event in our terms of trade. This is, at least potentially, the biggest gift the global economy has handed Australia since the gold rush of the 1850s".

Really? So then why are we all so miserable?

Well, as Glenn sees it, we're "mostly unhappy". And it's hardly a surprise. I give no truck to unhelpful economic definitions, such as "a recession requires two consecutive quarters of negative growth". For one thing, such a definition is extremely backward looking. It takes two months for each quarter's GDP result to be posted, suggesting the time to entering a "recession" and then finding out about it is eight months. At that point the response can probably be "well der".

As far as I'm concerned, recessions are a state of mind. Caution and uncertainty lead to a pulling back in spending and then it's all just a slippery slope from there. In fact, the technical definition is actually dangerous rather than helpful, because if you tell the country it's been in a recession then you're only going to extend the recession. "I'm hunkered down now," Joe Average would say, because I just learnt there's a recession on".

It is pretty clear at the moment that Australians certainly are "mostly unhappy", unless they're a twenty-something untrained mine worker who just bought their second investment property for cash. And Glenn has a list as to why: natural disasters; interest rate fear (despite, as the Chairman notes, that policy has changed just once in a year and that's the most stable outcome in five); bitter political debates over various domestic issues; and a clouded global outlook.

Glenn even makes a subtle hint that we might be all a little bit xenophobic at the moment too. We want China to grow and we're scared it won't, but if it does, we're a little scared of the longer term implications for global structural change. In short, everyone is talking about the "cautious consumer", and Glenn has no disagreement with the description.

But what Glenn thought we might find interesting is that the consumer started to become cautious at the end of 2007, evident by an easing off in consumption growth, and not more recently. Prior to 2007 incomes were growing fast but consumption was growing faster. Incomes have continued to grow since, albeit at a slightly slower pace, but consumption has plateaued. If incomes aren't the issue, why the caution?

The short answer might be we all buried ourselves in debt before 2007, so when the "credit crunch" began we suddenly became very nervous. Glenn's more lengthy explanation can be boiled down into two words: housing bubble. Between 1995 and 2005, household asset values rose at a rate three times that of the four previous decades. The share market was going up, but the bulk of value was in the family home. Then in 2008 the GFC hit and the trend changed. Values have increased since, but not at anything like the same rate.

Consumption levels have therefore dropped to reflect a change in wealth but not a change in income. And while Glenn never expected all to end in tears, he knew it did have to end one day. The good news is Australia suffered only a flattening of the trend rather than a collapse a la the US and elsewhere. Households suddenly went off the idea of borrowing more, and at the same time banks decided not to lend as much.

It is not unusual for Australia's economy to be driven by resources. It is unusual for Australia's economy to be driven by the consumer. This is not the US, where 300 million of the world's most affluent consumers drive 75% of economic growth. What we have now seen is the Australian consumer back out of the equation, returning to relative spending levels of earlier decades, while the resources boom has take over once more, this time with gusto.

With this has come structural change, notes Glenn. The resources boom will drive some, but not all other sectors. Some sectors, he implies, are heading for the dust heap of history. C'est la vie. And we're going to have to learn to adjust to an environment when the Aussie is king of the currencies, much to the horror of many economic sectors.

Coulda been, and could be, worse, notes Glenn.

The counter-effect of the drop in spending levels is the spike in savings levels of course, and the governor points out that savings have risen post the GFC at a far more rapid rate than they fell before it. Sort of a reverse stairs and elevators, one might suggest. At some point this rate of savings growth must itself abate, at the time when households finally feel comfortable with their balance of income, wealth and household budget. As to when that point may be reached is nevertheless, at this stage, unclear.

Such a level of stability may even occur quite quickly, were the various "uncertainty" factors currently dominating the country and the world to be resolved in some way. If Europe and the US both appear to get their houses in order (even if it is "can kicking"), if we come out of the floods and into the sunshine, and if the local parliament battles through the current turmoil, for example, confidence may turn swiftly upward.

Moreover, while the rate of savings growth has been historically very rapid this past couple of years, we are only now reaching more "normal" historical levels. And more importantly, while the RBA remains super-confident about Australia's terms of trade, it feels the rapid rate of growth out of the GFC is now slowing to a new plateau. It's a much higher plateau, ensuring incomes remain robust, but stability at the higher level should take the pressure of interest rates.

Sounds almost like a panacea ? households with solid incomes but sensible savings and a confident but not frenetic approach to spending. But we ain't there yet, and Glenn Stevens knows exactly why: "Everything comes back to productivity".

Aussies have a positive global reputation as a knock-about bunch who don't take life all too seriously. Or you could put it another way ? we're just plain lazy. History shows that whenever Australia is in a period of affluence, productivity levels fall. And they have fallen no faster than they have done this century. They are still falling, or at least weak, because the GFC did not result in wide-scale lay-offs. Reluctant to sack, employers cut back work times instead. The delicate balance resulted in only one thing ? a reduction in per capita GDP contribution, or "productivity".

Glenn sees it this way: "It has been observed before that past periods of apparent easy affluence, conferred by favourable international conditions, probably lessened the sharpness of our focus on productivity". The only times we have increased productivity have been as a response to economic shock. If it were the other way around, we'd all be laughing. The real panacea we might seek forms the conclusion of the governor's speech:

"The thing that Australia has perhaps rarely done, but that would, if we could manage it, really capitalise on our recent good fortune, would be to lift productivity performance while the terms of trade are high. The income results of that would, over time, provide the most secure base for strong increases in living standards. That sort of an environment would be one in which the cautious consumer might feel inclined towards well-based optimism, and re-open the purse strings."

World peace would be nice too of course, and an end to poverty. In other words, Glenn is simply describing some form of warped Utopia in which everyone works harder when they're doing well and backs off when there doing not so well. Of course the reverse is true. What's the point of working hard if you can't at some point relax and enjoy the spoils?

But productivity is not just about hard work. It's about investment, technological improvements, efficiencies, cost controls ? all the things that no one ever worries too much about when the money's really rolling in. If it ain't broke, why fix it? And of course, whenever the good times arrive no one ever thinks they might end.

So perhaps what Glenn is really saying is fret not ? the consumer downturn won't last forever. There will be structural changes however, so if you're a manufacturer for example, or a tour operator, you may need to rethink. In the meantime, the stuff under the ground can support us. As to when the sun comes out again, well...that's always hard to say. But when it does, don't forget today ? be productive.

Read the full speech here.

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