4 April 2020
1300 794 893

Is our economy in a death spiral that ScoMo has to rescue?

Peter Switzer
11 July 2019

Optimists were given a torrid time by consumers and businesses this week, which raises two important questions. The first has to be: is  our economy in a death spiral? And the second is: does ScoMo and Treasurer Josh Frydenberg have to reconsider their refusal to use their looming budget surplus to rescue the economy?

The answer to the first pretty well gives you the answer to the second.

Let’s examine the economic data out this week, which has been less positive than what we saw last week.

On Tuesday, the NAB business survey showed the positive ScoMo effect on business confidence was short lived. The business confidence index fell from 10-month highs of +7.3 points in May to +2.2 points in June. To understand this number, you should know that the long-term average is +5.9 points. That was a disappointing take on what businesses are expecting going forward. However the business conditions index, which evaluates how business is “right now” actually rose from +1.2 points in May to +3.4 points in June. But the long-term average is +5.8 points, so it’s still not great news. It’s just OK news.

Then on Wednesday, the Westpac consumer sentiment number for July was an absolute shocker. The monthly index fell by 4.1% to 96.5 points in July – the lowest level since August 2017! Adding insult to injury, the result is below the longer-term average of 101.5 points. A reading below 100 points tells us that pessimists are outnumbering optimists!

This has led ‘rational’ people to ask: how cold this negativity prevail following the surprise ScoMo win, two interest rate cuts, a tax rebate on the way, a minimum wage rise and a stock market sneaking towards an all-time high?

Well, it could be that the untrained economist in many Aussies is asking: why is the RBA so desperate to cut rates? And why is the Treasurer throwing quickie tax rebates at us?

These desperate rescue actions by the masters of monetary and budgetary policies might be spooking consumers and businesses!

That’s one possibility that might be relevant to a lot of my thoughtful countrymen and women. But there could be another piece of economist-rationalisation to explain this horrible week for data.

Yep, it might be too early to expect consumers to react to interest rate cuts that haven’t actually had time to impact their bank balances. Meanwhile, no one has actually received a tax rebate yet, so we might need to give consumers a couple of months before we pronounce them “dead” as potential contributors to the economy in need of a rebound in growth.

That’s the bad news. Is there any good news worth crowing about?

Well, yes, but it depends on who you are.

The NAB survey showed that the monthly reading of labour costs grew at a 1.5% quarterly rate in June, the strongest growth rate in eight years!

Now that’s good for wage earners and this has been a big problem for the economy. But this cost rise could explain why some businesses are less confident. That said, wages rising to lift consumer spirits should ultimately help businesses, provided those with pay rises don’t spend the money online and overseas!

Meanwhile, the ANZ weekly look at consumer sentiment found the measure of family finances compared with a year ago (‘current finances’) rose by 3.7% to +13 points, which was the highest level in five months. 

My best guess is that it’s too early to tell but if these business and consumer numbers don’t pick up over the next two months, then the economy is in worse shape than I thought and the ScoMo effect is a lot less long-lasting than I’d imagined.

However, if we don’t see a pickup in that time frame, Josh will have to give up his surplus to avoid a death spiral into a recession. The irony is that if a recession shows up, then the surplus is automatically killed off by rising dole queues and less taxes from those who lose their jobs.

And if that happens, those hoping for more house price falls will see their wish come true and that will hurt a lot of state government budgets, which rely heavily on a healthy property market.

Click here to sign up for a free 21-day trial to the Switzer Report.

Let us know what you think
Get the latest financial, business, and political expert commentary delivered to your inbox.

When you sign up, we will never give away or sell or barter or trade your email address.

And you can unsubscribe at any time!
1300 794 893
© 2006-2019 Switzer. All Rights Reserved
homephoneenvelopedollargraduation-cap linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram