Be proactive, not reactive
Interest rates didn’t rise yesterday, and no surprise there. Yet we keep hearing about how they will, inevitably, do so and in fact many, many times. Will these desk-bound, Canberra-centric economists ever shut up? Maybe they should go outside for a while, leave the ACT for a bit and visit a few shops, speak to a small business owner or two or visit a Queensland construction site (if they could find one). They might discover the real world.
Although mining-related stuff is going great guns, the rest (and it is a very big rest) of us are not. Technical recession or not (well, not yet, anyway – but the June quarter figures will leave no shadow of a doubt), we are facing some very tough economic times and an increase in interest rates any time soon will stuff things up big time.
I was going to quote a baker’s dozen or so of statistics, highlighting our current economic woes, but to be honest I don’t have the strength nor do you want to keep hearing about them. “More sugar,” someone emailed me the other day, and “less lemon”. I am listening, but it is bloody hard at present. I do prefer a blue sky over cloud.
This mining boom – let’s call it Mark II – is shaping up to be quite different from the first one. During the first leg of the mining boom (circa 2001 to 2008), our exports over imports (terms of trade for all you smarties out there) rose to the highest level since the early 1950s. Although a two-speed economy was evident then, the gap was perceived as less than today, due to limited government regulations, tax cuts and generous public handouts.
After a GFC-induced pause during 2008-09, the mining boom is back and according to some, big time. The terms of trade are up; unemployment (well as feebly measured by the ABS) is below 5%; apparently there are skilled labour shortages and almost all of the mainstream financial press are running headlines screaming BOOM! But this time around it feels (heck….it is) different. Why is this so?
Firstly, house prices have hit an affordability wall. With some good luck, it won’t turn into a collapse, but it has hit a serious barrier. Time will fix the problem – as wage growth catches up with housing prices – but this will take years to resolve. A dose of commonsense would do wonders. A change in planning policy would see housing affordability fixed almost over night. But there is a lot of inertia here, including in some of our biggest institutions (i.e. the banks). So I suspect a slow deflate (in real terms) is on the cards for Aussie homes for some time to come. Of course, there will be winners and losers as always is the case when an overall market type loses its pep.
Secondly, the Australian dollar is high and is likely to remain so. Profits, for many private businesses, are already changing to losses. High commodity prices and our high interest rates; against the world stage; are likely to ensure a strong Aussie dollar for some time to come.
Thirdly, policy makers (I really mean the RBA) so far have managed the second phase of this mining boom quite well; although the November interest rate rise was a step too soon, but everyone is allowed to make a mistake now and then. A fool, however, makes that same mistake twice; an idiot three times. I hope Glenn Stevens isn’t going to be foolish nor act like an idiot. Yesterday’s decision to leave rates on hold, at least, proved that Glenn is no fool, yet.
Given the tight Federal Budget – which as I have argued recently isn’t really what is needed now, as we need to stimulate the non-mining (the vast majority of the economy) sectors now for years to come – and the post-flood/cyclone slowdown, interest rates, for the time being at least, should remain on hold. My way of thinking is this needs to occur for at least another twelve months or so, maybe more.
However, if the general economy continues along its current trajectory in coming months, then last November’s pre-emptive strike will need to be reversed. Inflation (for now at least) is well under control; jobs advertisements are on the slide; house prices are also falling; fewer firms are posting gross profits; there has been no economic growth so far this year and manufacturing is contracting once more. Sorry, for the lemon infusion, but I couldn’t help myself!
Hmmm, sound like we might see interest rates actually fall next rather than rise. I might have been right after all. The RBA confesses in yesterday’s media release that the current cash rate setting is mildly restrictive. I think that come August this mild settling will feel severe indeed. Fingers crossed (the sugar) that it doesn’t come to this.
Regardless of the future direction of interest rates, what would help the situation – and stop all the jawboning and resultant negativity – would be some very clear advice from the RBA outlining (in plain English please) their prognosis for the next financial year and when (and by how much) interest rates might change. This monthly interest rate guessing game is counterproductive. Run through a budgetary process, factor in the variables and let us know. If nothing else, it will help shut up all those damn economists waxing lyrical about every minute detail that is muttered by GS and his band of merry men (and two ladies).
And the final reason, and the main one, why this boom, for most of us, feels more like a recession, is the lack of confidence. Yes, consumer attitudes have changed fundamentally. And I don’t buy into the surprise lift in April’s retail turnover, as a sign that we are going back to our old spending ways. Consumption is out and saving is in. Most, too, are less interested in taking on debt. But things right now have become outright gloomy – we are squirreling money away like our lives depend on it – yet our balance sheet indicates considerable strength.
One of the key reasons for this gloom is the almost daily threat of looming interest rate rises.
Glenn please, from this day onwards, tell us a year in advance, when to expect a change in interest rates and by how much. Proact, stop reacting – this constant game of cat and mouse needs to stop.