The big news this week is that the Australian economy looks to be in a spot of bother. That’s why the Reserve Bank cut official interest rates.
Normally this is a reason to cheer as the cost of borrowing is reduced and more money gets to slosh around the economy generating investment, jobs and general prosperity.
However, this interest rate cut (to record lows of 1.25%) is a sign that global headwinds are having an impact on Australia. It seems our populace is already fully indebted and very cautious about the future. That caution manifests itself in a tightening of the purse strings due to uncertainty. And who can blame them?
The political environment has been plagued with instability and unpredictability. Thankfully the predicted Labor government didn’t succeed as their policy approach would have diminished consumer confidence even more.
Therein lies the key to growing an economy and why this interest rate cut is more ominous than optimistic. Confidence.
Confidence is everything when it comes to business investment and consumption. When people are confident about the future they will borrow money to purchase the things they want. When business is confident about the future they will borrow money to invest and create jobs and prosperity.
Consumers will borrow money at whatever interest rates are available if they are confident that their jobs and income are secure and their cost of living is manageable. Businesses will borrow at whatever rate they can if they are confident the return on investment will compensate them for the risk.
But confidence is sadly lacking in the Australian economy today. For consumers, every electricity bill brings a pall of fear. Medical costs, government fees and charges, food and utility prices seem to rise at every shop but wages remain steady and jobs insecure. Little wonder the average family worries about their financial lot.
For those with a mortgage, the interest rate cut will provide some limited relief but I don’t think it will encourage them to lift their level of consumption – until they are confident about their own financial future.
It’s the same with business. Sure, the cost of funds will diminish but will a long-term investment be justified by lower interest rates?
Interest rates are at record lows for a reason. Our economy is showing signs of being in trouble. Our record economic expansion, fuelled by migration and population growth, is in jeopardy and the Reserve Bank knows it.
The business community also knows that there aren’t that many more bullets in the chamber for the RBA to fire. At these levels, interest rate cuts provide diminishing returns. When they are exhausted then quantitative easing becomes an option. This is better known as money printing. After that negative interest rates may be used. This is where it costs you money to have cash in the bank or buy a bond.
These processes have been happening around the world over the past few years with mixed results. The radical measures have papered over the cracks that the world is enslaved by debt (much of it government debt) which simply cannot be repaid using traditional methods, even at record low-interest rates.
Expect more interest rate cuts in the months ahead but each one will not be a cause for joy but a sign that the problem is only getting worse.
It is my hope that Australia can avoid the worst of this spiral by cutting the size of government, reducing the welfare state and slashing tax rates for the embattled wage earner. That will take political courage and a commitment to prudent policy and good government.
Thankfully, after the election result, we are in with a chance.
Things that make you go Hmm…
A footy fan ban and a propitiously positioned pigeon gave the locals something to scream about. While a parking penalty provokes a pretty pique, you can make a rich man really mad and a formerly left-wing provocateur also seem “insane”.