You’re in trouble as a central banker when you’ve lost the crowd.
A day after Reserve Bank governor Philip Lowe said people might need to reduce their spending or work longer hours to help cover the spiralling cost of living, Adam Liaw offered his own take to his 121,000 Twitter followers.
“I genuinely find it hard to wrap my head around the fact that we’ve created a financial system where, when ordinary people find it hard to make ends meet, our main mechanism of economic control is to force them [to] give more of their money to private banks making billions of dollars,” the season two winner noted.
Liaw knows his way around a kitchen. He’s all over balancing the sweet and sour with the bitter, salty and umami.
While Lowe may not know his oregano from his thyme, he does know a lot about monetary policy and its importance in achieving economic growth, keeping a lid on unemployment and bringing inflation to heel.
The problem for the governor is that after 12 interest rate rises in 13 months, the community’s trust in his monetary policy abilities is ebbing. Fast.
Treasurer Jim Chalmers, under fire from the Coalition for his handling of the federal budget, this week spoke for the amateur chefs, the home buyers and the renters who are facing more financial pain because of the RBA’s actions.
“I do expect that there will be a lot of Australians who will find this decision difficult to understand and difficult to cop. The Reserve Bank’s job is to squash inflation without crunching the economy,” he said after the bank raised the official cash rate to 4.1 per cent.
The growing issue is whether even before Tuesday’s decision by the RBA, it had set the economy on course for that crunch.
This week’s national accounts, covering the first three months of the year, highlighted the pain being felt by households from the Reserve Bank’s first 10 rate increases.
Overall economic growth for the quarter was just 0.2 per cent. Once population growth is taken into account, GDP per capita fell 0.2 per cent.
The household savings ratio dropped to its lowest point in 15 years as people dipped into their piggy banks to make ends meet. While higher-priced day-to-day goods are eating into consumers’ spending power, so are the Reserve Bank’s interest rate increases.
In the March quarter of 2022, Australian households paid $16 billion in mortgage interest and fees. This March, they handed over $28 billion, a 75 per cent jump.
Remember, this was before the May and June rate increases. And even the March quarter, because of the way commercial banks take time to pass on rate rises, underplays the full impact of what the RBA has done.
Analysts at Deloitte Access Economics reckon the retail sector, which employs 1.4 million people, is already in recession because of the hit being felt by consumers.
Deloitte partner David Rumbens says particular parts of the community are bearing the brunt of inflation and higher interest rates.
“Younger people have been disproportionately impacted by the higher cost of living, particularly via rents, and so are curbing spending more than older Australians,” he says.
The squeeze on the retail sector is evident in the end-of-financial-year sale promotions. Ordinarily, they would kick off in the second or third week of June, but because retailers are struggling to get people through the door this year, many of them started in late May.
Even that may not be enough.
Barry Urquhart, the managing director of marketing insight firm Marketing Focus, has just completed a string of focus groups in Sydney, Melbourne and Perth that asked shoppers about their spending intentions.
He says people were primarily focused on cost-of-living pressures, interest rates and inflation. That does not bode well for businesses trying to attract customers in the coming months.
“It is evident that consumers are not being greatly tempted or influenced by big discounts, sales events and creative advertising,” he says. “Overall, people appear to be more disciplined and financially prudent than usual.”
They are being more disciplined because of the hit to their take-home incomes.
The head of Capital Economics’ Asia-Pacific section, Marcel Thieliant, estimates real disposable income has fallen by 4 per cent over the past year, the biggest drop since the early 1980s (when the country was in recession).
Thieliant believes the RBA will take the cash rate to 4.85 per cent over the coming months. That will rip another 3 per cent out of real disposable income, contributing to a “mild recession” in the second half of this year.
“We now expect consumer spending to fall across the second half of the year. And with dwellings investment set to weaken further as house prices decline yet again, GDP should fall across the second half of the year, too,” he says.
“We’re forecasting GDP growth of just zero per cent the end of this year, far below the RBA’s forecast of 1.2 per cent.”
The economy is sending all sorts of mixed signals in the direction of the Reserve Bank.
In a speech this week, Lowe touched upon one of the issues making the bank’s job more difficult.
Falling house prices normally act as a brake on consumer spending. The less wealthy you feel, the less likely you are to head down to the local furniture shop for a new rug.
But as house prices tumbled through most of last year, consumer spending held up. That was largely attributed to all the extra cash people had in their pockets thanks to government stimulus and the RBA’s previously low interest rates.
Now house values have started to increase. That is clearly a concern for the bank.
“The headwind for household spending from falling housing prices looks to be coming to an end and could be replaced with a tailwind from increasing housing prices,” Lowe said this week.
Yet while house values have climbed, the actual number of places for sale is extremely low.
CoreLogic estimates inventory levels are 15.3 per cent down on the same time last year and 24.4 per cent below the five-year average for this time of year.
Lowe has also been unafraid to wade into the issue of wages, noting increasing a person’s pay without a lift in productivity inevitably leads to inflation and then higher interest rates.
The governor has been talking about the link between productivity and wages since he took over the RBA in 2016. Productivity growth rates have deteriorated since then, albeit after a short spike in 2020 caused by the impact of COVID-19 restrictions.
This week’s national accounts showed annual productivity falling at its fastest rate on record, down 4.6 per cent over the past 12 months.
Yet that figure was heavily affected by the floods across northern NSW and south-east Queensland in March last year that resulted in a collapse in working hours that month. The June quarter, which showed people returning to work, recorded the biggest quarterly drop in productivity since 1979.
Small and medium-sized businesses are at the coalface of productivity.
In the most recent of its regular surveys, business tax and accounting service firm MYOB found more than half the nation’s 2.4 million small and medium-sized enterprises are expecting an economic decline over the next 12 months, with almost a third preparing for a drop in revenue.
There are some positive signs. A quarter of those quizzed by MYOB said they had digitised more of their operations over the past year, with 37 per cent saying this had boosted overall productivity.
A similar number said the best way to lift their productivity was through improving skills and training programs.
“We know this is a challenging environment for SMEs, with 40 per cent already impacted by rising interest rates. The survey results indicate that many small businesses are being cautious and holding steady, rather than investing in their business growth,” MYOB’s Emma Fawcett said.
To boost productivity would require more spending on skills or investment in infrastructure. That would be extra money going into an economy struggling with inflation pressures that the Reserve Bank is dealing with through higher interest rates.
Even Adam Liaw would struggle to come up with a palatable dish from those ingredients.
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