One economic indicator has been bothering me for months.
The Australian benchmark share market index is now close to an all-time high — roughly 3 to 4 percentage points away from it.
Earlier this year it fell close to 10 per cent, which would have been a “technical correction”, but it rebounded and has stayed elevated.
This indicator suggests economic “blue skies”, boom times and happy days.
But just this week the National Australia Bank released the results of its Consumer Sentiment Survey covering the first quarter of this year.
It found that, “by income, 4 in 10 (37 per cent) low income earners are experiencing very high cost of living stress, but even among higher income groups, the share is 1 in 4 (23 per cent)”.
Living costs are also weighing heavily on consumers who are renting, it said: “40 per cent of house renters report very high cost of living stress.”
And let’s not forget the jobs market is the tightest it’s been in around 50 years.
So what are we? Happy, sad, afraid, frustrated or confused? Actually it’s all of the above.
Happy about jobs, easing cost-of-living pressures
The fundamental economic problem of our time is inflation, or the rising cost of living.
Some of the inflation pressures Australians feel stem from overseas and are connected with the war in Ukraine, and supply chain bottlenecks arising from the pandemic. It’s all pushing business costs up and those firms are passing those higher costs onto their customers.
Inflation first began to appear in the United States, so Australians watch American inflationary indicators very closely for any signs of an easing in cost of living pressures.
Some encouraging news emerged this week when inflation fell to 5 per cent, the lowest it’s been since 2021.
Analysts say the financial markets took this news at face value, and saw it as a sign the cost of living python’s great squeeze on developed economies around the world could be easing.
“Better than expected or in-line data on inflation internationally has the equity markets excited about a potential for a pause on rates,” bond investor Angus Coote told The Drum.
“Various individual central bankers themselves have been talking about pauses [to interest rate hikes] as well.”
It’s pretty simple logic: easing inflation pressures means there is less of a chance interest rates will continue to climb, which makes it easier for companies to churn out a profit.
This helps explain the stock market’s flirtation with a new record high — especially when, according to The Australia Institute, many companies have managed to ride the inflation wave without letting go of their profit margins.
There was also some encouraging news in the jobs market this week.
The unemployment rate returned to a near 50-year low of 3.5 per cent: we essentially now have full employment and a very tight labour market.
Notwithstanding challenges faced by some Australians, including those with disability, the odds are now that if you want a job, you’ll be able to land one.
There’s also now a record number of Australian women participating in the labour market and many have moved from part-time to full-time work.
It’s all very positive: asset prices are rising, cost-of-living pressures could be easing and there’s more work to be found.
But then frustration sets in.
Frustrated about sticky inflation
You see, while easing inflationary pressures are welcome, the evidence continues to point to so-called “sticky” inflation — both overseas and here.
That is, some price pressures are coming down. But gas, electricity and rents continue to rise and now, petrol prices may potentially be heading up thanks to new OPEC+ oil production cuts.
Treasurer Jim Chalmers reminded Australians this week Australia’s inflation is expected to remain higher for longer.
Many predict the world’s biggest economy, the US, is heading for a “mild” recession, though Jim Chalmers still believes Australia can avoid a “hard” economic landing.
But here’s where it gets a bit scary. We simply don’t know how the Australian economy is going to hold up over the next six months.
Households are enduring rising prices, sluggish wage growth and a chronic housing shortage combined with surging migration, which has led to a housing crisis.
According to the latest Reserve Bank Financial Stability Review, when all of the RBA’s interest rate hikes (so far) have worked their way through to bank customers’ accounts, about a third of borrowers will see the difference between what they earn and what they spend — their disposable cash — cut by more than 40 per cent.
Close to 15 per cent of borrowers will see their disposable income vanish.
Angus Coote believes that while the Reserve Bank’s interest rate pause is a reprieve for borrowers, there’s more financial stress on the way.
“Whilst this is encouraging news it takes time for the aggressive rate increases already seen to properly wash over economies and we would expect to see a slowdown in economies for the back part of this year,” he says.
Australia’s “much stronger” employment figures, he adds, could spur the RBA to resume its rate hiking cycle in May.
But much rests on the official measure of Australian inflation to be released on April 26, Coote says — and if that is weaker than expected, the RBA may continue to hold the cash rate at 3.6 per cent.
Afraid of a recession
The financial markets correctly predicted the Reserve Bank would leave the cash rate on hold this month. Unfortunately, those markets are also now seeing a recession ahead.
How do we know this? Brace yourself for a gnarly bit of financial markets jargon but it’s to do with an inversion of the yield curve.
Put simply, the cash rate (the interest rate set by the Reserve Bank), is now higher than the interest rate on 10-year bonds.
The cash rate is 3.6 per cent and the 10-year bond rate is 3.3 per cent — a 0.3 per cent difference.
To put that in context, in a growing economic environment, the 10-year bond rate would be much higher than the cash rate. That is, higher interest rates are needed to manage a hot and growing economy.
As recently as late last year it was up near 4 per cent, but fell heavily in March — possibly due to data showing a pull-back in spending and the ongoing international banking crisis.
The financial markets are clear that interest rates will need to fall in the not-too-distant future as business and household economic activity contracts — something the Reserve Bank would be loath to concede.
Sad about the housing crisis
Australians live in a global economy. The global financial crisis produced a trauma that’s still with us to this day.
Indeed the remedies to the crisis — taxpayer bailouts of corporations too big to fail and cheap funding for those with assets — helped entrench deep inequality seen both in the United States and here in Australia.
A recent Australia Institute report found that, between the global financial crisis and the start of the pandemic, the wealthiest 10 per cent of households held 93 per cent of income produced by the economy.
The pandemic then led to huge amounts of government stimulus which, once borders reopened, came flooding into the economy, stoking inflation.
Low wage growth, a surge in migration and a chronic housing shortage have now produced both a cost-of-living crisis and a housing crisis.
According to the National Australia Bank, 40 per cent of renters are dealing with very high levels of financial stress.
To be clear, many of these tenants had (and the use of the past tense there is intentional) dreams of owning their own home one day.
Still, there appears to be little appetite to make serious inroads to improving housing affordability.
The government’s $10 billion Housing Australia Future Fund is estimated to deliver 30,000 new social and affordable homes over the next five years.
But property analysts, including SQM Research’s Louis Christopher, say that falls short of what’s needed, while more housing construction projects are being abandoned and builders go bust.
Confused about why it all seems unfixable
All of these factors may leave you in a state of confusion.
The obvious question is: why do many of the problems above seem unsolvable?
Small business and community advocate Peter Strong believes Australia lacks the sort of robust data that would help policymakers deliver meaningful solutions to some of the economy’s big problems.
“The current employment information is confusing for me and for the people I talk to,” he says.
“The figures don’t add up when we consider increases in skilled migration, people seeking second jobs to offset increased loan repayments, the continued lack of workers in most industries.”
The data, Strong argues, are “too broad” and don’t allow for meaningful insight. “The vagueness is being used by the left and right of politics to make statements that are questionable.”
During the pandemic the Coalition leaned on scientific information to make what would otherwise be unpalatable political decisions.
Similarly, Strong believes policymakers should lean on hard, credible facts to make their arguments for change, but those facts are lacking.
There are other obvious problems.
The economy is dominated by large monopolies with unprecedented power over wages growth and the prices they charge consumers.
You can add to that a housing market that’s been propped up by a favourable tax environment, cheap money and investor speculation.
The US government’s frantic attempts to rescue insolvent US banks last month was another reminder that the top priority for governments is to protect the stability of the financial system, even if that creates moral hazard.
Looking ahead, surging migration may prevent Australia from entering a technical recession, and it’s certainly helping to alleviate the skills shortage, but it’s also leading to soaring rents and entrenching the housing affordability crisis.
I receive many research notes and commentary pieces in my role at the ABC. I can’t recall a time when there’s been such a mix of optimism, fear and pessimism among policymakers and financial services professionals.
These people are also feeding governments their analysis to help manage the economy.
An alternative theory is that solutions for boosting Australians’ living standards and reducing their anxiety are there for the taking. But no one’s game to announce them.
Source : ABCNews