Thursday, December 04, 2008

It's raining money

Acknowledement: The Weather Girls.

Overnight the Bank of England cut its rate 100 points to 2%. The European Bank cut 75 points to 2.75%. NZ cut its rates 150 points, and so on.

Here in Australia, Craig James says we are about to get a deluge:

"Keen surfers are always on the look out for the next big wave. Well, a wave of tsunami proportions is set to hit over the next week – a wave of cash. From December 8 the Government’s economic stimulus payments will be flowing to pensioners, carers and lower-income families. But at the same time, rate cuts will be flowing through to home buyers, boosting disposable incomes. And then there is the fall in the price of petrol, with prices now regularly below $1 a litre in capital cities.

So how much is all this stimulus worth to the economy? The Government payments are easy to work out. The payments to pensioners and carers are worth $4.8 billion. The payments to Australian families are worth $3.9 billion. To work out the boost to homebuyers and motorists though requires some calculations...

There are 8.3 million families (households) in Australia and around a third are paying off home loans. Working on the conservative assumption that the average outstanding loan is $150,000, and almost 3 percentage points in rate cuts, then the quarterly boost to spending power is $2.1 billion.

Now for petrol, the drop in prices from $1.63 a litre to around $1.00 a litre boosts spending power for the average household by $267 a quarter of around $2.2 billion.
Add this all up and you get a figure of $13 billion. That is, there is an extra $13 billion of spending power compared with six months ago. If all these extra dollars were spent, it would boost quarterly household spending by around 8 per cent. Of course not all this will be spent, and that’s the hard part in working out the impact on the economy. But even if 70 per cent was spent, housing consumption would rise by over 5 per cent.

The bottom line is that it is raining cash. And while the Government and Reserve Bank can’t make people spend, its clear that there are plenty of incentives. Importantly, we have just focussed on a small number of influences that we can quantify. But retailers are also cutting prices in the hope of getting more people through the doors.

Then there are the longer-term influences or measures. If consumers spend more at the stores then business income and spending rises, giving firms more reasons to maintain staffing levels. In other words there are multiplier effects on the economy.

And over the next 6-9 months the increased first home buyers grants and $300 million payments to councils will serve to boost construction activity. The priority list of infrastructure projects is also due to be submitted this month so spending can begin in early 2009. The combined value of the infrastructure funds is $26 billion. In short, prepare for a major year of spending and construction work."