Was that the sound of the economy hitting a brick wall?

Thu, 06 Apr 2017  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/sound-economy-hitting-brick-wall-013818115.html 

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Was that the sound of the economy hitting a brick wall?

Thump!

Was that the sound of the economy hitting a brick wall?

It looks like economic conditions have deteriorated in the early months of 2017 which means the government’s efforts to ramp up its preparations for the budget on 9 May are being undermined. As Treasury works through the latest numbers on government revenue and spending, it is having to put in weak numbers into its forecasting spreadsheet that will constrain its efforts to get the budget back into surplus within the next few years.

The economic news is starting to be of such concern that perhaps the budget deficit is dropping down the order of policy concerns, particularly if, as seems likely, the looming housing slump acts as a trigger to undermine consumer spending and the economy more generally.

Of most concern has been the stalling in employment growth and rise in the unemployment rate to just below 6 per cent. Linked to that is the rise, to a record high, for the underemployment rate. Just under 2 million people are currently unemployed or underemployed which is not only a social problem, but a macroeconomic one. Not working at all or not enough hours means there is a significant part of the workforce being underutilized, not earning – and spending – their wage and in doing so, getting the perpetual motion of economic growth entrenched.

At the same time, growth in wages is at a record low which has feed into the slump in retail sales growth which in February which recorded one of its weakest months in almost 17 years. Business investment remains sluggish, despite reasonable levels of business confidence, and credit growth continues to weaken. The only bright area for the economy is the strong performance of export volumes.

And even on this score, there are some worries starting to build. The surge in commodity prices that was evident during 2016 is starting to go into reverse. The iron ore price is now 15 per cent down from its recent high while coal prices have dropped around 30 per cent in recent months, both of which will pare back the gains to national income from what was a promising commodity price pick up.

A strong Keynesian would argue that these are not the circumstances where spending cuts and tax increases – the main means to return to budget surplus – are appropriate. Indeed, the case could be made for constructive fiscal stimulus to ensure the growth momentum of the economy picks up and the negative news on jobs and inflation reverses.

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