The despair of Ross Gittins

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Last week Ross Gittins suggested we all throw in the towel vis-a-vis understanding the economy and today he follows through in a convulsion of public despair:

The release of two downbeat indicators of business and consumer confidence last week serves only to deepen the puzzle over the gap between how we feel and what the objective indicators are saying about the state of the economy.

…I’m a great believer that the mood of consumers and business people does a lot more to drive the business cycle than it suits most economists to admit (because their theory tells them little about what drives confidence and, in any case, it’s not easy to be sure what you’re measuring).

So it pains me to admit that at present – and not for the first time – the conventional confidence indicators seem to have been bad predictors of what has happened in the economy, and don’t look like reliable predictors of what will happen.

I’ll just note, in passing, that subdued confidence has for most of the past eighteen months been an excellent indicator of future growth and an even better one for inflation and interest rates. Now, on with the Gittins capitulation:

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I think there’s a gap between how people are feeling and how they’re acting. How consumers and business people feel is a function of their direct experience and what their peers are saying and doing, but also of what the media is telling them about the wider world.

They probably give a lot more weight to the former than the latter. Direct experience tells them things aren’t too bad; interest rates have dropped in the past six months and they’ve seen little in the way of job losses close to them.

On the other hand, the media are bringing them a lot of worrying news about Europe and elsewhere. It seems pretty clear this is having a big effect on how they feel. It’s less clear how much it has affected their behaviour – so far, at least.

I suspect the present mood is also affected by political sentiment. A lot of people have decided the economy is being badly managed.

The NAB business survey showed 47 per cent of respondents believed the May budget would have a negative effect on their business. This seems a huge overreaction to the one piece of bad news for business in the budget: the cost of a cut in the company tax rate of a mere 1 percentage point was instead being paid into the pockets of business’s customers.

And consider this: when you divide the consumer sentiment index according to federal voting intention, you find the index for Labor voters stands at 119, whereas the index for (the far greater number of) Coalition voters is down to 82.

Perhaps the main thing the confidence indicators are telling us is something we already know: the Gillard government is highly unpopular.

Hmmm. While I have no doubt that the Gillard government is on the nose for its own reasons, one of the major ones has to be that the economy sucks for most Australians. Sure, in aggregate we’ve been going along OK. But the growth is extraordinarily lopsided, away from the vast majority of us, who are not acting differently to the way they are feeling at all. Most are getting poorer by the day, with net worth as a percentage of annual household disposable income back to 2002/3 levels:

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Nor do aggregate figures for household spending hide the simple fact that retail spending has stalled for five years. I don’t need to show a chart to prove it. You all know it. Aggregate household demand is not enough to absorb current supply, hence falling profits across the sector despite a high dollar hugely increasing margins. There was flourish of spending in the first quarter, as we know from the national accounts, which can be seen in this chart released late Friday as a part of Westpac’s Red Book (find it below):

Westpac explained it this way:

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Recent official data on economic growth, consumer spending and retail sales have also been stronger than expected. However, to the extent that this is not a quirk of the data, we are inclined to see this as a brief flourish as interest rate cuts, improved sentiment (including on the global backdrop) and low prices converged to draw out pent-up demand earlier in the year.

As such we continue to expect a moderation in consumption growth from here back to a more sedate 3% pace going forward (a restrained sub-1.5% pace in per capita terms).

The precursors to this moderation are already evident.

Whether or not this is the actual source of the Gittins argument today, you have to ask why he’s happy to beat up a “mystery” about Australians acting out of line with the way we feel. Australians feel poorer and are acting accordingly, by spending less and saving more. The first quarter is an aberration.

Gittins’ colleague, Ian Verrender, did a much better job on the weekend when he backflipped on recent bullish articles about housing and declared:

As soon as the first round of the global financial crisis took hold in 2008, corporations and households targeted their debt levels. Our public companies raised more than $100 billion in just a few months in 2009 to restore their balance sheets. And consumers decided that it was more important to pay off the credit card and reduce the mortgage than keep on spending.

But for all the advantages of good housekeeping, there is also a downside.

Less spending means companies earn less money. Share prices drop. In fact our stockmarket is now about 40 per cent lower than its 2007 peak which, in turn, hits our superannuation and retirement balances.

The greatest impact, however, is on real estate, the traditional area where Australians make their biggest investment. People borrow less for housing and so real estate values decline. Those paper profits, the imagined profits Australians were making based on a two-decade boom in the housing market – and which many borrowed against to fuel consumption – are no longer.

Prices have eased for two years in most cities and that situation is likely to continue. The stronger dollar may be empowering us to buy cheaper imported televisions, but our deflating assets are making everyone cautious. And as traditional industries strive to reduce costs and remain competitive, they inevitably will lay off workers, further spooking consumers.

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Does it matter? Yes, it does. As former Reserve Bank of New Zealand Board member, Terry Macfadgen, commented on MB over the weekend in reference to the recent Glenn Stevens speech that triggered much of the current round of economic commentary navel gazing:

Given the paucity of intelligent commentary about the economy-and the downright silly posturing of most politicians-it is vital that Stevens and his team should continue to contribute to the public discourse. Right now that contribution is needed in spades.

There is a big challenge however in relation to the constitutional understanding that the RBA cannot “get political”. That means a lot of what he says has to be couched in central banker speak which is a mystery to average punter – and that’s where MB has a huge role to play. Keep up the good work please.

Get with the program, RG.

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West Pac Redbook June 2012

About the author
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.