Craig Emerson: Australia a “house of cards”

Advertisement

By Leith van Onselen

Former Labor minister turned economic consultant, Craig Emerson, is the latest to roast the Australian economy, declaring it a “house of cards”. From The AFR:

Retail sales figures released last week add weight to my warnings as far back as 2014 that the Australian economy is a house of cards. The 2014 federal budget assumed consumers would dramatically increase their spending while real wages stagnated or fell. It predicted that home owners would spend up big on the back of their increased wealth from rising house prices. That hasn’t happened and now, with house prices easing, consumers have become downright gloomy. Pull the house-price card out and the whole economy can collapse. Such is the folly of orchestrating a housing boom as a substitute for an economic strategy.

Other indicators attest to the fragility of the Australian economy. Wages growth remains insipid. While employment is growing, underemployment has been rising… Energy prices, too, are rising, as are the prices of other non-discretionary items such as childcare and healthcare…

Australian households are borrowed to the hilt, a worrying proportion of mortgagees having taken out interest-only loans and an even more worrying proportion of those not understanding what they have done. They will get a shock when the banks call upon them to begin repaying the principal they have borrowed. To make matters worse, despite the Reserve Bank’s cash rate remaining unchanged, mortgage interest rates have begun edging up as international wholesale funding costs begin to rise.

When retail sales enjoyed a couple of good months among many bad ones, consumers were dipping into their savings to maintain their spending. No more. It could never be sustained. If, out of their flat wages, consumers spend less while they rebuild their savings, then growth in consumption – accounting for almost 60 per cent of the Australian economy – will be negative…

And if the US Federal Reserve starts raising interest rates again, Australia’s mortgage interest rates will rise regardless of whether the Reserve Bank keeps the cash rate on hold – which it will for the foreseeable future. Those economists predicting the Reserve Bank will soon begin raising interest rates are living in Rainbow Land…

Instead of being encouraged into productivity-raising pursuits, the federal government has encouraged investment in a house of cards by refusing to pull back on tax concessions for investments in rental properties.

Last week it was Bloomberg, and now we welcome Craig Emerson to the Crapstralia club.

“First they ignore you, then they laugh at you, then they fight you, then you win”.

Advertisement

[email protected]

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.