Thursday, November 09, 2017

Better economic days ahead? Sorry, not yet

Why do people feel so rotten?

It's because they don't believe the federal Treasurer when he says there are "better days ahead".

He's said it 25 times, roughly once a week since April.

If things were really looking up, retailers wouldn't need to cut prices to maintain sales. During the June and September quarters, retail prices fell 0.2 and 0.4 per cent. Fell. It's rare for prices to fall across the entire retail sector for an entire quarter. It's even rarer for them to fall for two consecutive quarters, and rarer still for them to fall that much. It's the biggest wave of discounting this century.

What did the price dive deliver? An increase in spending of 1 per cent. In department stores, where prices slipped 0.3 per cent, spending slid 2.2 per cent.

ShopperTrak monitors retail traffic in real time. Store owners and shopping centre managers feed it video, Wi-Fi and the output of heat sensors to enable it to work out how many people are in participating stores at any given time and how long they stay. In September, foot traffic was down 6 per cent on the same period the previous year. In the first three weeks of October, it was down 7.5 per cent.

It's partly because we're switching to shopping online, where, for big items, we can get lower prices, often from overseas. But it's also because, even with low and sliding prices, we are less keen to shop.

Ask us whether we expect better or worse conditions in the year ahead, as the Melbourne Institute does every month, and only 21 per cent say "better". That's the average for the past 12 months. Back in the final year of the Gillard government and the last months of the mining boom, 30 per cent said better. Back further in the last year of the Howard government, 33 per cent picked better.

It's the same when you ask about the next five years: only 21 per cent of us expect better times; 26 per cent expect worse. Back in the final year of the Howard government 44 per cent of us expected better times, and only 22 per cent expected worse.

Like businesses reluctant to invest whatever the interest rate, households that are wary will be reluctant to spend whatever the price. Officially, inflation is just 1.8 per cent, keeping pace with record low private sector wage growth of 1.8 per cent. But 1.8 per cent is an overestimate.

The Bureau of Statistics conceded as much on Monday when it revamped the consumer price index to take into account changed buying patterns. The index measures the price of the basket of goods that is said to represent the purchases of a typical consumer. But what's typical changes over time.

In the seven years since the index was last revamped, we've switched to a basket of goods whose prices are growing more slowly, making the true inflation rate probably 1.5 per cent (the bureau hasn't said; private economists have had to do their own calculations based on the make-up of the new basket). It means inflation is probably well below the Reserve Bank's target band of 2 to 3 per cent rather than just a bit below it.

And it could be lower still. Macquarie Group economist Justin Fabo believes the bureau isn't fully measuring the full effect of loyalty discounts at supermarkets. Its price measures are at odds with those of Coles and Woolworths. And it calculates changes in price of online items by "scraping" websites, taking insufficient account of the practice of shopping around and buying from the cheapest offering at the time. Macquarie reckons Australia's actual inflation rate could be just 1.3 per cent, close to an all-time low.

And what inflation there is isn't the result of us bidding up prices because we are desperate to spend, the so-called "demand" inflation that would result from a belief there were better days ahead. The prices susceptible to demand inflation are the ones that are falling or barely climbing. The prices that are climbing, strongly, are those beyond our control, pushed up by the government or international events: alcohol, tobacco, petrol, gas, electricity and public transport – none of them climbing because of pent-up demand.

But better times will come, because there are more of us in jobs, right? Employers will bid up wages and we'll bid up prices.

An extra 371,500 of us have found jobs in the past 12 months, predominantly in "healthcare and social assistance". In the past year that one sector accounted for 130,600 of the new jobs. The economics team at JP Morgan reckons this is in large measure due to the National Disability Insurance Scheme. The new workers are mostly women and mostly on government-controlled contracts that give them little bargaining power. Jobs growth in manufacturing, retail and construction – the sectors whose jobs are normally associated with better times –is much, much weaker.

There may well be better days ahead, one day. There are few signs of them right now.