It’s time to end the “strong economy” propaganda

Thu, 20 Jun 2019  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/its-time-end-strong-economy-propaganda-230414837.html 

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It’s time to end the “strong economy” propaganda

For the last year or so, it has been obvious to anyone with an open mind that the economy is in trouble. Unfortunately, the government and the Reserve Bank not only ignored this growth slump, but they ran a propaganda campaign saying the economy was “strong”, that unemployment would keep falling and wages growth was poised to pick up.

It might have been politics that lead the RBA and Treasury to this view with the recent election swinging on the economic credentials of both major parties. Ahead of the election, the RBA and Treasury were loathe to undermine the government with an honest assessment of the rapidly spreading economic problems.

It is possible that the forecasts were a simple error, which sometimes happens when an external shock hits the economy.

Either way, things are so bad in the economy right now that forecasters are rushing to out-do each other on how low interest rates will go in this cycle. Some are canvassing negative interest rates, printing money or the need for a fiscal policy boost if the economy remains in its economic funk.

Time will tell.

The range of forecasts that where regularly produced by the government (Treasury) and the RBA up until very recently were unambiguously optimistic. The forecasts ignored all hard data on the economy, which suggests it may have been a political strategy to remain upbeat, rather than it being a clumsy forecasting error.

This has created a problem not just because the forecasts were embarrassingly wrong, but they lead to policy errors which are now seeing a sharp rise in unemployment and an extension of the economic slump.

There is clear economic pain in Australia as a result.

Unfortunately, the bulk of economists and the commentariat swallowed the RBA and Treasury propaganda hook, line and sinker. This was to the point where there was a near unanimous consensus from market economists that interest rates would either be flat of would need to rise and the budget would cruise into surplus.

The RBA interest rate cut earlier this month and the surplus is looking fragile, although we wont find out the 2019-20 budget outcome until September 2020. Prior to the election, the government and RBA were rarely queried on their forecasts, which meant the depth and duration of the downturn has been more severe than is should have been. There was, in other words, no pressure to adjust policy to minimise the downturn.

Only now, well after the economy has extended the per capita recession to three quarters, where the unemployment rate is going up, not down, where wages growth is mired a few ticks above 2 per cent are people coming out to suggest the economy is in trouble.
Had the RBA and Treasury been honest with their assessment of economic conditions a year ago, in particular the failure for inflation and wages to materially increase, interest rates would have been cut and consideration could have been given to an easing in fiscal policy. That is, some tax changes and / or spending decisions to support growth. Such a reactive, even pro-active, policy stance would have helped to provide a floor under growth. It is likely that the economy would be growing around 2.5 per cent now, not 1.7 per cent as we saw in the recent GDP data. As a result, it is also likely the unemployment rate would now be towards 4.75 per cent and that wages growth would have edged up to 2.5 per cent, perhaps more.

There would be no talk of recession.

The forecast errors and associated policy mistakes have cost tens of thousands of jobs, crimped business profits and investment and left wages growth lower than it would otherwise be. It is hard not to feel the pain of those people needlessly made unemployed. The bad news is that things are likely to get worse before they get better.

The speed at which policy is eased from now will determine how quickly the turnaround will come.

The RBA needs to cut interest rates more and there is case for some fiscal policy easing as policy makers mop up from their earlier policy failure. Without such action, the economy will remain in the doldrums and more people will become unemployed.

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

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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.