Saturday, December 11, 2010

Uncomfortable maths. Employment up 4.7%, retail spending up 3.9%

The West Australian's Shane Wright on why we're sitting on our hands:

"Conservative consumers have got the Reserve Bank in a bit of a quandary. While the Reserve is lifting official interest rates (though it should leave home loan borrowers alone at its last meeting of the year tomorrow) for fear of a consumer-led inflation breakout, those same consumers are not playing ball.

The Reserve is terrified that as we go through what is shaping as a once-in-a-century explosion in our terms of trade, the cash flooding into the country will be parlayed into higher and higher prices as shoppers spend up.

The problem for the Reserve is that on the available evidence so far that is just not happening...

Last week’s September quarter national accounts provided the latest sign that so far consumers are sitting out the boom.

In the 15 months between December 2006 and March 2008 — when the mining boom was in full roar and the Reserve was jacking up rates to control inflation — household final consumption spending rose 6.3 per cent.

But in the 30 months since then the same measure of what households were spending was up just 3.9 per cent.

That includes the period of interest rates at a 50-year low and the Federal Government’s cash handouts.

Clearly, the big spending lift pre-global financial crisis was unsustainable.

We were not handling the mining boom well.

The housing boom was well entrenched, credit from all banks and non-banks was easy, and Canberra was delivering tax cuts.

It was effectively a perfect inflationary storm, and it required the Reserve to take rates just before the collapse of Lehman Brothers and Bear Stearns to 7.25 per cent.

But the GFC has seemingly changed consumers’ mindsets.

Much was made of household consumption growing about 0.6 per cent in the September quarter.

But given 106,000 people moved into the jobs market during that period, it would be almost impossible for household consumption not to grow.

In that December ’06 and March ’08 period when we were spending up, total employment grew 486,400, or about 4.7 per cent.

But since then employment has grown 536,400, or 5 per cent.

In other words, even with the total number of people getting work increasing faster than in the pre-GFC salad days, we’re not spending nearly as much.

The Reserve has talked at length about the emergence of the conservative consumer, with governor Glenn Stevens again touching on the phenomenon in a recent speech.

“Considering what has happened around the world in recent years, more cautious behaviour by households is not surprising,” he said. “Nor, I would argue, is it unwelcome.”

But Mr Stevens does not believe we will keep shut our wallets and purses for too much longer.

“To expect it to absorb a major surge in consumption at the same time as an historic increase in investment is also occurring would be rather ambitious,” he said. “In fact, we probably need private saving to remain on a higher trajectory, and we will also need public saving to rise, as scheduled.”

But what if he is wrong?

What if we have been so cowed by the events of the past two years (and the ones ahead) that we are not going to go on a spendathon?

That has pretty serious ramifications for the Reserve and its efforts to curtail inflation.

Big international global investment company PIMCO, which in this country manages about $28 billion in fixed income (with a heavy focus on the bond market), is banking that the conservative consumer coupled with governments intent on cutting expenditure will keep a lid on growth over coming years.

Senior vice-president Tony Hildyard last week said those investors punting that sharemarkets would bounce back in the near term would do their money because they were ignoring the new mindset that would slow the global economy.

“In fact, for the first few years of the corrective phase, global growth has the potential to trend even lower as deleveraging and high unemployment constrain consumers,” Mr Hildyard said.
In Australia, unemployment is not the problem.

But as the national accounts (and associated credit card figures) show, we are saving a lot more of our hard-earned money.

The household savings ratio pushed back above 10 per cent last quarter and has been there since the GFC. Five years ago it was negative. What is going on is deleveraging. That, by itself, is not a bad thing, as Mr Stevens said.

However, it requires a bit of more nimble thinking by the Reserve and policymakers.

Higher interest rates will not necessarily work in a country where people are not the cause of consumer inflation.

Canberra simply can’t afford to hand out tax cuts like it did pre-GFC, so the chance of funnelling mining tax revenues direct to shoppers is slim. And as the Reserve said in its submission to the Senate’s banking competition inquiry, the interest rates banks are offering on deposit has gone from an average 60 basis points below the official cash rate to 70 points above it.

Where pre-GFC putting your money in a bank account and waiting for the interest to swell your savings was a mug’s game, now there is money (albeit not at a great return) to be made in the savings game.

It is easy to forgive shoppers for sitting on their hands.

The past two years have been tumultuous on the economic front. That tumult continues, with everyone waiting for another part of Europe to succumb to a bank bailout, the US in a gridlock and Japan slowly ebbing away on the back of huge demographic changes.

The only saving graces are China (which is trying to defy the history of communist rule everywhere) and India (which had trouble pulling together a Commonwealth Games).

No wonder we will not leave the couch and the comfort of our cut-price big-screen TV. Who wants to go outside and face that sort of economic weather?"

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