Will the Banking Royal Commission undermine the economy?

Tue, 24 Apr 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/will-banking-royal-commission-undermine-economy-054126660.html 

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Will the Banking Royal Commission undermine the economy?

 For those of us worried about the health of the economy, economic growth and the objective of full-employment, the findings of the banking Royal Commission are extremely worrying.

There is a real risk that the revelations about the misconduct and devious practises of the banks will have the dual effect of undermining already fragile sentiment and will force the banks to tighten up on their credit policies. If ether of both of these happen, there would be a downgrading of investment and spending plans in an economy that is already growing below its long run trend. Sound, financially secure and well-run banks are the bedrock of a modern and successful economy.

Banks and other financial institutions allow consumers to borrow money for their house, to fund some of their personal expenditure while at the same time, often manage their superannuation savings. They also help business, big and small, expand and invest.

When there is broadly based high level of confidence in how these relationships and transactions function, with professionalism and prudence, the economy generally runs like a well-oiled machine. Money is lent, savings accumulate and businesses invest and employ. When there is a crisis of confidence, when uncertainty increases about the veracity and functioning of the banking system, the wheels can quickly fall off the economy.
Which leads to the yet to be felt fall-out from the Royal Commission.

The blanket coverage of the evidence given so far, including on social media, is likely to cause some to have second thoughts about safety and effects of doing business with their bank. Banks share prices are sharply lower. But even if the effect is marginal, it will undermine credit growth and therefore spending and investment at a time when the economy is struggling to lift its performance.

Recent data on employment, retail sales, house prices, building activity, wages and inflation are all weak. Credit growth, which measures the growth in borrowing, is already showing signs of weakening.

In annual terms, the latest data shows that housing credit grew by 6.2 per cent, the weakest result since 2014. Personal borrowings are falling, down 1.1 per cent over the past year and they have been declining since 2015. Business borrowing, which is so vital for any upswing in business investment and job creation, is increasing by just 3.6 per cent which is well down from the 7 per cent growth rate seen in 2016.

Suffice to say, there is already evidence of a mix of soft economic activity and weak credit growth across the main sectors of the economy.

With the Royal Commission still having at least 8 months to have public hearing and the possibility this gets an extension, the run of disconcerting news and evidence is likely to continue for that time. The banks are likely to try to stay clean from now, not wanting to attract any further negative blow back while the Commission is hearing evidence and before the recommendations are forthcoming. This could see them further curtail their lending, for fear of writing bad loans at a time when the economy is just muddling along.

Suffice to say, one of the unintended consequences of the banking Royal Commission might be to drag the economy lower from an unimpressive starting point. When the RBA is signalling the next move in official interest rates is up and when household wealth is being eroded by falling house prices, this could end very badly.

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Why Australians have lost $300 Billion this year

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This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/3665708-004156966.html 

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Why Australians have lost $300 Billion this year

The total wealth of Australians has dropped by close to $300 billion since the start of 2018.

How much of that is yours?

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This is an important trend given the solid link between the change in wealth and household spending. Numerous studies show that when wealth increases, growth in household spending is faster than it would otherwise be. It appears that householders view their extra wealth in a manner that sees them lower their other savings or use that wealth as collateral for additional borrowing fund extra consumption. They may even ‘cash in’ their extra wealth and use those gains to fund additional spending.

When they observe falling wealth, experience weak wages growth and realise their savings rates are perilously low, they will adjust their spending – down.

Labor almost home, not quite hosed

Mon, 22 Oct 2018

The extraordinary vote in the Wentworth by election, with the 18 or 19 per cent swing against the Liberal Party, presents further evidence that the Morrison government is set to lose the next general election.

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The election is unlikely to be held before May 2019, which is a long 7 months away. A lot can happen in that time but for the Liberal Party to get competitive, but for this to happen there needs to be a run of extraordinary developments.

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If, as most now seem to suggest, Labor is ‘across the line’, $1.25 is a great 25 per cent, tax free return for 7 months ‘investment’. Yet, punters are not quite so sure and seem to be holding off the big bets just in case something out of the ordinary happens.

While some segments of the economy look quite good, at least on face value – note the unemployment rate and GDP – others that probably matter more to voters – husong, share prices, wages and other high-frewquency cost of living issues are all looking rather parlous. And none of these are likely to change soon.

There is an old saying for punters – odds on, look on. But $1.25 for Labor seem great value.