When should you worry? When something bad happens, or before something bad happens… in anticipation?
The economics profession is hard because much of it involves predicting the future, which, of course, is impossible.
That being said, governments and policy makers want to plan for the future, so they need a body or an organisation that can indeed help them see around corners.
It’s not just governments that are keen to know what’s ahead. Households want to know too, because if you’ve got a family and a mortgage, or you’re only just making rent, you need to know if things might change.
In recent weeks, one thing has become certain. Threats to the economy have become so prevalent, even the normally sanguine Reserve Bank has backtracked on its economic outlook.
Reserve Bank backtracks
Last week the Reserve Bank did something quite rare. It downgraded its economic growth forecast.
Here it is in plain English.
“For 2018, the outcome is affected by the surprisingly soft GDP number in the September quarter and the ABS’s downward revisions to estimates of growth earlier in the year.”
“For 2019 and 2020, the forecasts have been revised down by around ¼ percentage point, largely reflecting a modest downgrading of the outlook for household consumption and residential construction.”
OK so that’s the official pointy-head language. What is the bank saying exactly?
Well simply that shoppers are expected to keep their cash in their pockets and stick to window browsing because the cost of living for many is still outpacing any growth in their wages.
In addition, the construction boom that has filled the city skylines with cranes for the past 5 years is falling away, as are the jobs associated with it.
Over half of all the economic growth generated in this country comes from consumers. So when consumers don’t go out and shop, because they’re being thrifty, or don’t know if they’ll still be in a job by the end of the week, the economy, as a whole, slows.
So far though I’ve been talking about an underlying dynamic in the economy that’s existed for some time. Other threats are emerging too.
Take the Banking Royal Commission, for example.
There was a sigh of relief that the Commission didn’t recommend further restrictions to lending standards in the final report, but is that the end of that matter? I don’t think so.
Commissioner Kenneth Hayne has recommended a ‘regulator’ for the regulators – a body that will keep the regulators, ASIC and APRA, on the straight and narrow.
The performance of our banking sector is integral to the economy, and I suspect that, as time goes on, the banks will find themselves under more and more pressure to correct practices that have become entrenched over the years – practices that have been quite lucrative for them.
The great reformation of the banking sector is already underway, yes, but some uncertainty remains as to how much the banks’ business models will need to change and how that could affect the availability of credit in the economy, and growth.
Drilling down a little further, the property market itself is also causing some headaches for policy makers.
The Reserve Bank has even conceded that the effect on spending that a fall in house prices could create, is a great unknown in the economy.
What the bank should have said is ‘we all know if house price falls merge from a correction to a crash, we’re all done for’. But that wouldn’t be very proper, would it.
I’ve spoken to experts in my capacity as a reporter with the ABC that say house price falls won’t hurt the economy, but there are an equal number of people who are quite worried about the effect of a falling property market.
It is a worry.
Jobs jobs jobs
I want to talk about the jobs market now… because that’s what it all comes down to, right?
Tony Abbott promised to create a million jobs. He did that. Scott Morrison is now promising 1.25 million. He may also do that.
It’s well known though, among economists, that to achieve this sort of job growth, which may in fact, lift wage growth, you need an economy growing (GDP) at 3 per cent or above.
Given the Reserve Bank’s recent growth downgrades, and the economic threats that remain, I’m highly sceptical this will happen.
The Reserve Bank, however, is quite is still quite confident about it.
“The outlook for the labour market remains positive. Our central scenario is that growth will be sufficient to see a modest further decline in unemployment to around 4¾ per cent over the next couple of years.”
And let’s not forget there also external threats to our economy.
China’s – Australia’s largest trading partner – economic growth outlook is very muddy.
It was once said to me that if China’s economic growth rate falls below 5.5 per cent, Australia will enter a recession. It’s not near 5.5 per cent now, but it edges close to that every year.
And don’t even mention China’s debt problem. Good grief.
Reserve Bank scratching its head
Here it is in a nutshell: the Australian consumer (shopper) needs to go out and spend. To do that, she needs a secure, full-time job, and the ability to comfortably keep up with living expenses (including utility bills).
Once that happens, shops will likely be more confident to raise their prices, and that will make them more profitable, enabling them to hand out more pay rises… and so growth happens.
This helps to protect Australia from external shocks too.
What troubles me about all of this is that it’s the Reserve Bank’s task to put in place a policy framework that will help facilitate this. That begins though with understanding this. It’s my understanding (unfortunately I cannot reveal my source) that the bank’s economic modelling isn’t giving the board an accurate picture as to what’s going on.
There are threats to the economy, but I also see threats to an effective policy response too… and therefore how we will all fair.
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