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 

----------------------------------------------------------------------  

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.

comments powered by Disqus

THE LATEST FROM THE KOUK

The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/the-governments-test-in-2020-220310427.html   

---------------------------- 

The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced. 

What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.