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Peter

Trump is the President

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For the last year or so, it has been obvious to anyone with an open mind that the economy is in trouble.

Unfortunately, the government and the Reserve Bank not only ignored this growth slump, but they ran a propaganda campaign saying the economy was “strong”, that unemployment would keep falling and wages growth was poised to pick up.

It might have been politics that lead the RBA and Treasury to this view with the recent election swinging on the economic credentials of both major parties. Ahead of the election, the RBA and Treasury were loathe to undermine the government with an honest assessment of the rapidly spreading economic problems.

It is possible that the forecasts were a simple error, which sometimes happens when an external shock hits the economy.

Related article: What to do in a declining property market

Related article: Watch out Australia: There's a flood of dismal economic news on the horizon

Related article: What would rescue the Australian economy?

Either way, things are so bad in the economy right now that forecasters are rushing to out-do each other on how low interest rates will go in this cycle.

Some are canvassing negative interest rates, printing money or the need for a fiscal policy boost if the economy remains in its economic funk.

Time will tell.

The range of forecasts that where regularly produced by the government (Treasury) and the RBA up until very recently were unambiguously optimistic.

The forecasts ignored all hard data on the economy, which suggests it may have been a political strategy to remain upbeat, rather than it being a clumsy forecasting error.

This has created a problem not just because the forecasts were embarrassingly wrong, but they lead to policy errors which are now seeing a sharp rise in unemployment and an extension of the economic slump.

$2,000 pay cut for hospitality workers

Thousands of hospitality and retail workers will have their penalty rates cut on 1 July.

There is clear economic pain in Australia as a result.

Unfortunately, the bulk of economists and the commentariat swallowed the RBA and Treasury propaganda hook, line and sinker.

This was to the point where there was a near unanimous consensus from market economists that interest rates would either be flat of would need to rise and the budget would cruise into surplus.

The RBA interest rate cut earlier this month and the surplus is looking fragile, although we wont find out the 2019-20 budget outcome until September 2020.

Prior to the election, the government and RBA were rarely queried on their forecasts, which meant the depth and duration of the downturn has been more severe than is should have been.

There was, in other words, no pressure to adjust policy to minimise the downturn.

Only now, well after the economy has extended the per capita recession to three quarters, where the unemployment rate is going up, not down, where wages growth is mired a few ticks above 2 per cent are people coming out to suggest the economy is in trouble.

Had the RBA and Treasury been honest with their assessment of economic conditions a year ago, in particular the failure for inflation and wages to materially increase, interest rates would have been cut and consideration could have been given to an easing in fiscal policy. That is, some tax changes and / or spending decisions to support growth.

Such a reactive, even pro-active, policy stance would have helped to provide a floor under growth. It is likely that the economy would be growing around 2.5 per cent now, not 1.7 per cent as we saw in the recent GDP data. As a result, it is also likely the unemployment rate would now be towards 4.75 per cent and that wages growth would have edged up to 2.5 per cent, perhaps more.

There would be no talk of recession.

The forecast errors and associated policy mistakes have cost tens of thousands of jobs, crimped business profits and investment and left wages growth lower than it would otherwise be.

It is hard not to feel the pain of those people needlessly made unemployed.

The bad news is that things are likely to get worse before they get better.

The speed at which policy is eased from now will determine how quickly the turnaround will come.

The RBA needs to cut interest rates more and there is case for some fiscal policy easing as policy makers mop up from their earlier policy failure.

Without such action, the economy will remain in the doldrums and more people will become unemployed.

Stephen Koukoulas is no nonsense economist who calls it without fear or favour. He is currently Managing Director of Market Economics as well as being a Research Fellow, Per Capita. Stephen is also a keynote speaker at Ode Management.

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On 05/06/2019 at 9:00 AM, more said:

Pretty much, this is his quote:

"When Mexico sends its people, they're not sending their best. They're not sending you. They're not sending you. They're sending people that have lots of problems, and they're bringing those problems with us. They're bringing drugs. They're bringing crime. They're rapists. And some, I assume, are good people."

So...... what’s wrong with this. He’s just stating the obvious. Though he probably could have dropped the rapist comment. 

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On 05/06/2019 at 1:22 PM, Bored@work said:

So this is all trumps work in the last few years. Or is it thee knock on effect from the previous government?

It’s all Trumps work. This is what the experts will tell you than are not aligned to politically biased journalism.

 

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On 11/06/2019 at 10:28 AM, BarryBevan said:

 

Related article: Watch out Australia: There's a flood of dismal economic news on the horizon

 

Geez.... I hope you are right.!!!!

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On 11/06/2019 at 9:29 PM, IronJimbo said:

Good thing the economy isn't going to get belted with $380 billion in extra taxes then, eh?

That’s one lever of an overall policy agenda that was rejected. 

What should we do about this downturn. NAB state retail downturn concerns. RBA considering quantitative easing.

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42 minutes ago, BarryBevan said:

That’s one lever of an overall policy agenda that was rejected. 

What should we do about this downturn. NAB state retail downturn concerns. RBA considering quantitative easing.

I think a recession would do the country and economy a lot of good

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57 minutes ago, BarryBevan said:

Why?

People have become complacent and inefficient. When things are to easy it leads to poor and eventually uncompetitive outcomes. Look at the standards of tradesman for example-its pretty much an accepted outcome these days that you will have a heap of defects that need to be argued and complained about. There is so much work that the onus is now on getting a job completed as fast as possible to maximise your turnover-reputation isn't as big a factor as it once was when there wasn't so much work. Thus the overall standard has dropped. Yet they are making an absolute fortune.

Same story in white collar jobs-the general standard in candidates is terrible. People want top dollar yet are sub standard and have poor work ethic. All due to there being no competition leading to complacency.

When standards are poor, inefficient and expensive industry looks to alternative options-such as overseas, leaving the country a lot worse off. A little recession/kick up the bum could do the country a great deal of long term good IMHO.

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8 hours ago, more said:

I think a recession would do the country and economy a lot of good

Paul Keating..... The recession we had to have!!!

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7 hours ago, more said:

People have become complacent and inefficient. When things are to easy it leads to poor and eventually uncompetitive outcomes. Look at the standards of tradesman for example-its pretty much an accepted outcome these days that you will have a heap of defects that need to be argued and complained about. There is so much work that the onus is now on getting a job completed as fast as possible to maximise your turnover-reputation isn't as big a factor as it once was when there wasn't so much work. Thus the overall standard has dropped. Yet they are making an absolute fortune.

Same story in white collar jobs-the general standard in candidates is terrible. People want top dollar yet are sub standard and have poor work ethic. All due to there being no competition leading to complacency.

When standards are poor, inefficient and expensive industry looks to alternative options-such as overseas, leaving the country a lot worse off. A little recession/kick up the bum could do the country a great deal of long term good IMHO.

If demand outstrips supply, should we see an increase in wages and then a more active economy?

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