Both the government and the RBA are talking the economy down, and painting a picture that’s much worse than reality. Trouble is, it’s working. If they’re not careful a temporary blip in confidence could become a more permanent depression.
Poor little Aussie economy. No one’s giving you a go.
If you believed everything you read, you get the sense the Australian economy is about to go into some sort of B-grade celebrity meltdown.
And who’s leading the cheerleaders of doom? The government itself – both the mob in Canberra, and lately the RBA itself!
You know you’ve got it tough when the very people who are supposed to be looking after you are the ones doing the trash talking.
So how did Canberra and the RBA become those horrible parents on the junior soccer sidelines?
Well Hockey and Abbott have found a line that’s selling well and they’re running with it for all it’s worth. That is, the previous government has lumped them with a budget disaster, and now we all need to chip in to a tough budget in order to clean up ‘Labor’s mess’.
See how neat this narrative is? Abbott and Hockey are the long suffering mum and dad who do their best to keep the place neat and tidy, but as soon as the kids come home (Labor) the place is a mess again. The poor coalition’s got to do the hard work to clean it up, because who else is going to do it? Labor? Ha!
It’s a story every parent can relate to.
Never mind that the Charter of Budget Honesty means that everyone gets a look at the books before the election, and never mind that the real bug bears in the budget are generational factors – like population ageing – or cash handouts (like the Family Tax Benefit) that you yourself brought in.
“Labor’s mess” is a narrative that sells well and we’re running with it. Even to the point of using it to justify a whole lot of broken promises.
But the public will only swallow these broken promises if they’re completely sold on the idea that there’s an impending crisis – that we’re only weeks away from a total economic meltdown.
And on that front, the spin machine has done too good a job. The economy’s a mess and Dad’s on a rampage.
And as a result, consumer confidence has tanked. The ANZ Roy Morgan poll showed sentiment was down 4% last week, following a similar sized fall the week before. Consumers are panicking.
According to ANZ:
The policies of most concern to the consumer spending outlook at this stage are the mooted temporary deficit reduction levy and the proposed changes to the eligibilities for welfare and pension payments… These policies, if introduced, would impact consumption both directly and indirectly.
Well, maybe. I’m always sceptical about studies that rely on people being able to correctly interpret the impact complex legislation is going to have on an impossible-to-predict economy. I spend most of my days thinking about it and I’ve got no idea what’s going on. How well does the ‘average consumer’ understand these things?
These surveys seem totally driven by the news cycle, which as I’ve argued before, only has a tenuous connection to real events.
But perceptions matter, and that’s why we do these surveys. If consumers start feeling skittish, they can cut back on spending and grind the economy to a halt. It doesn’t matter where they get these ideas from. Only perception counts.
And we’re seeing the same thing play out with property investors.
Digital Finance Analytics’ recent investor survey found a significant fall in how likely investors were to purchase now. A few months ago, investors were 68% likely to purchase a property in the next 12 months. Now that’s down to 38% – a significant move.
But when you break it down, guess what’s the biggest barrier to purchase? Yep. The Budget.
Now a massive 45% of investors say that they’re being put off by budget uncertainty – up from practically nothing a year ago, and completely dominating any other factor.
When DFA drilled into it, they found that the high income levy was cited by nearly 45% of investors who have decided not to transact at the moment. Potential changes to negative gearing accounted for 31%, and changes to superannuation rules 12%.10% blamed potential changes to other benefits.
Again, I’m pretty sceptical. There’s a lot of uncertainty around all of these policies. But in a way, it doesn’t really matter how well the policies are understood. What matters is people’s perceptions about how secure their finances are. If the tax burden looks like it might change, people will naturally become a bit more conservative with their choices.
And temporary blips in consumer and investor confidence can become self-fulfilling prophesies. If fear persists for long enough, actual spending decisions can be impacted, and we can get market-wide down turns.
So Canberra is playing with fire.
The fear campaign around ‘Labor’s mess’, along with a budget response that seems to be modelled more on Rambo than James Bond, has given people the willies. It might be a politically expedient way to push through the things you want to push through, but if it’s not careful, the government could end up with a genuine mess on its hands.
The RBA is also out there pushing a very sombre outlook – more downcast than the data justify – but they’re playing a very different game.
More on that next time.