The economy - a mad woman's breakfast

Tue, 09 Sep 2014  |  

Just how strong is the economy right now?

Well, it's a bit like the mad woman's breakfast – all over the place.

Bottom line GDP growth is pretty good – 3.1 per cent is at face value a pace that policy makers would be delighted to achieve year in, year out. But the growth momentum and composition of that growth is not generating sufficient jobs for the population increase and as a result, the unemployment rate is grinding higher and at the latest read, is at a 12 year high of 6.4 per cent.

Consumers are all over the place. They are increasingly wealthy from a boom in house prices and a buoyant stock market, yet real wages and household incomes are falling. Consumer sentiment is fickle – up and down like a bride's nightie but in the main, consumers are erring on the side of caution with savings up and there is only moderate growth in spending.

Then there is the business sector. The miners are getting smashed and investment in the sector is falling at a very rapid rate. The non-miners seem optimistic, but the lift in non-mining investment is tepid at best.

Amid this patchwork for the economy, the most recent official inflation data up to the June quarter show prices increasing at a pace in the upper part of the RBA's target, although the TD-MI monthly inflation gauge shows price pressures easing markedly into the September quarter. Maybe inflation will ease towards 2 per cent by early 2015.

Throw into the smorgasbord a horrible growth outlook for Europe yet a decent recovery in the US and ongoing momentum in China and India and the global picture is again unclear.

One thing that is obvious is the free-fall in Australian based commodity prices and with that, the terms of trade. This is pole-axing national income is damaging profits, government revenue and with that, adds to downside risks.

Then there is the budget. Even the die-hard Coalition supporters judge the Budget to be a horribly unfair and the fiscal strategy is making the budget deficit and government debt larger than was laid out in the Pre Election Fiscal Outlook document. Who would have thought that?

All that budget pain for no fiscal gain. Whatever the judgments about the budget, there is not much doubt that sentiment is being undermined by fears of Medicare co-payments, hikes in university costs, petrol tax rises and the like.

The bottom line of all this is that the economy is in reasonable shape, but it is highly vulnerable to even the slightest thing going wrong. Whether that thing is over-reach on the budget from the government, further falls in the terms of trade, a market event from the Eurozone, China or the US, or a reversal of the house price surge – who knows.

But it is a climate that it likely to see policy makers starting to lose sleep. It would be interesting indeed, if a bit of bad news came along when the economy is shaky.

We all know that the RBA would cut interest rates if the bad news unfolded but it is not so clear whether the government would be willing to implement some fiscal stimulus given its zealotry on government debt and deficit.

After a period of low market volatility and generally solid news on the economy, it seems that the risks are building rapidly.

Hold on to your hat – it could be a bumpy ride.

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