With both sides of politics running scare campaigns such as “your house price will crash”, “your super will be trashed” or “your penalty rates will vanish”, you might expect consumers to be down in the dumps.
But not so, according to the latest ANZ-Roy Morgan consumer confidence data. Their index has ticked up 1.1 per cent and for the third week in a row shows the national mood above its long-term average.
The index tracking consumer optimism for Australia’s economic prospects in the next year surged a surprising 6.1 per cent.
That all feeds in nicely to the Coalition’s economic narrative, which centres on tax breaks for small business. To get SMEs to invest and create jobs, the Turnbull government needs those businesses’ customers to stay upbeat.
On the other hand, the confidence survey is at odds with a number of frightening economic forecasts for 2017 – falls in both mining and non-mining investment, dollar-linked price increases for imported goods, the risk of a China slowdown further hitting national income and tax revenues, and the ongoing shutdown of auto manufacturing to name a few.
In releasing the data, ANZ head of Australian economics Felicity Emmett commented: “With the economic outlook still quite uncertain, we expect that confidence will remain sensitive to developments in the domestic economic data, as well as the evolution of the political debate in the lead-up to the July election.”
She’s right. Scare campaigns don’t keep consumers spending, and during the next six weeks of campaigning there’s a good risk of nasty data shocks such as a surge in oil prices, another stock market slump, or unexpected jobs cuts from one of our corporate giants.
One of the main reasons given by ANZ and Roy Morgan for the run of buoyant confidence figures was the RBA’s decision to cut its target cash rate to 1.75 per cent two weeks ago, which is now flowing through to mortgage holders.
As reported earlier this week, three of the big four banks passed the rate cut in full, with ANZ passing on 19 of the 25 basis point cut. In straightened times, the prospect of a royal commission into banking surely encouraged that largesse.
Confidence up, economy down
If the rate cut really is driving higher confidence, it says a lot about the current topsy-turvy state of the Australian economy.
For one thing, low rates reflect low growth. Borrowing to fund consumption, which many households have continued to do in the past year, doesn’t lead to sustainable growth – just spikes in data sets such as the retail sales figures.
What the Reserve Bank hopes when it cuts rates is that business and individuals will borrow to invest in productive assets.
The trouble is, each time the RBA cuts, it mainly stimulates borrowing in the housing market – which is no more ‘productive’ than it was when Australia’s epic credit bubble began inflating at the turn of the millennium.
Another downside to low rates can be seen in older consumers, particularly retirees, many of whom have large slices of their assets stashed in savings account and term deposits. The interest they receive on their balance generally, though not strictly, follows RBA rate moves.
Most worrying of all is that hard-up households are looking to rate cuts to fuel higher consumption, because wage increases ahead of inflation are getting thin on the ground.
In approximate terms, roughly one-third of Aussie households are renters, a third have mortgages, and a third (those oldies with the saving accounts) live in houses they own and have paid off.
It’s the middle third, the mortgage holders, who will welcome any future rate cuts most.
Our addiction to low rates
But how did we come to this? Waiting for manna to fall from heaven – or rather from the less than heavenly RBA – is waiting for growth to weaken further.
Which ever party cuts through with the scare campaigns in this election will need to turn this attitude around.
The economy badly needs an inflationary pulse, whether via the Coalition’s plan to boost investment through small business tax cuts, or through public investment, especially in productivity enhancing infrastructure.
If, or when, that is achieved the most highly indebted households will find it hard to make ends meet.
But for the economy overall, pushing inflation back into the RBA’s 2 to 3 per cent target band, and starting to lift official rates above their current record lows would be a genuine reason for rising confidence.
And that depends, of course, on who wins the battle of the scare campaigns leading up to the July 2 election.