Attached is Myer’s profit downgrade release. The Myer downgrade is becoming a staple bi-annual event buy today was a little more worrying that usual. On current trading conditions, Bernie Brookes said:
…the result was solid considering the very difficult trading environment in April, which has continued in the first few weeks of the fourth quarter.
So, to put some context around yesterday’s horrendous Performance of Services (PSI) index, I’ve drawn the following chart of the history of the major components.
As you can see, outside of the GFC, the collapse of the April PSI is without precedent in its ten year history. For comparison, check out the small shock delivered by the 2011 new year floods. Clearly the Australian services economy endured a shock of some magnitude in April and we need to explore what that might be, as well as what the implications are for the future.
There is little to corroborate the PSI at this point. The R.P. Data daily house price index began to decline mid month. Roy Morgan’s consumer confidence measure, on the other hand, has been rising slightly. And that’s all we have to go on.
Yesterday, I contended that the services economy was probably hit by the very vocal shift by the banks to unilateral interest rate movements. These transpired amid a backdrop of imminent government austerity and ongoing job losses.
Such a development does seem to me to be enough to constitute a shock to consumers that are already disleveraging, have historically high debt and have relied heavily upon the assumption that the RBA will be there to protect them in the event of trouble.
If that’s the case, then we need to ask if this shock will pass, go sideways, or get worse.
The closest analogy I can draw is not actually with Australia. In the US last year you may recall the September debt-ceiling debacle in which the Tea Party nutters effectively blocked supply in order to prevent further expansion of the US Budget that had carried the economy. S&P downgraded the sovereign subsequently. The economic fallout was immediate, with a number of production indicators falling very suddenly. The good news, of course, is that the shock passed quickly and the US actually enjoyed a little inventory cycle bounce out of the event.
Can we compare this to the April Australian PSI? Perhaps.
On the positive side of the ledger, the US shock was a similar scale macroeconomic event. However it transpired in a very different environment and ended very differently as well. The US consumer has been deleveraging feverishly for three years. He is somewhat hardened by the experience I would say, with few illusions left about the risks of debt.
The Australian consumer, on the other hand, has been constantly pampered by rhetoric of exceptionalism from leaders in all quarters. He has not yet deleveraged, rather only disleveraged, reducing the growth of his borrowings not seeking to reduce them.
Moreover, the outcome of April events is that the RBA’s ability to control interest rates remains fundamentally in question. Some of that sense of uncertainty will have been assuaged by the recent 50bps cut. But of course the big cut might also entrench the uncertainty given the banks are not, again, passing it all on.
So will it pass?
Perhaps, the mining boom is genuinely huge. Much of the weakness in the services economy is actually planned by the RBA as a part of it’s management of an “adjustment” to mining led growth. But as I’ve said before, in an economy saddled with high household debt, there is no saying that such an adjustment must proceed smoothly. Indeed, it is a very difficult balancing act that could easily overshoot as business cycle dynamics take over from the central bank.
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Since then the R.P.Data daily house price index has fallen consistently. Roy Morgan confidence was crunched and now Myer warns of ongoing “very difficult” trading conditions. These are hardly tier one economic data sources but my gut is telling me there’s a freeze on in households. That’s before we mention the hit to the nation’s external position.
Ware the business cycle. We need another rate cut in June. A big one.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
