SA businesses are walking an economic tight rope
Heading into the final quarter of 2017 the confidence of SA SMEs is, according to the Sensis Business Index, at its highest level in six years.
The latest ANZ-Roy Morgan Consumer Confidence Index has also surged above the long-term average, driven by a 4.3% gain in positive views on the national economy for 2017, and, surprisingly, a 3.5% rise in expectations for good results during the next five years.
Surprisingly, because many economists are predicting a slowing of the global economy and a substantial downturn in 2018, while a current analysis reveals one in five Australians with a typical $300,000 30-year home loan won’t be able to afford a rate rise of only 25 basis points.
Furthermore, in October Australia had its sharpest fall in retail spending in four years – attributed largely to householders’ financial stress. This adds weight to industry experts’ belief that interest rates will stay as they are for longer than previously expected – although they will almost certainly have risen by 2018, pressured by what appears to be an inevitable rate rises in the US.
How can it be then that SA’s business confidence is the strongest since 2011? Sensis says it’s generated by a growing number of solid businesses with specific business strengths and it’s this focus these businesses would need to maintain for current positivity to survive predicted economic hazards. According to Sensis they’d have to maintain focus despite “negative opinions about the State Government” and “concerns about an unfavourable business environment” they’d expressed in the survey.
Australia’s problematic economic structure
Macks Advisory takes no particular comfort from Australia’s recently acquired world record of 104 successive quarters of recessionless, unbroken economic growth. The problem is our country’s economy still tends to rely too heavily on housing and mining.
By 6 October this year banks were required to comply with new Australian Prudential Regulation Authority (APRA) rules which have caused most lenders to raise rates sharply on interest-only housing loans. In an attempt to cool what has become an overheated housing market, the rules, introduced in March, restrict banks to portfolios with no more than 30% of interest-only loans
Yet analysts have reported a mere 0.1% overall drop in the value of mortgages held on the books of sector regulated banks. Already some of these banks, in attempting to arrest the decline, have lowered rates for certain housing loans even as would-be interest-only borrowers are reportedly turning in droves (no figures available) to unregulated lenders in the so-called shadow banking sector.
Coping with Australia’s economy is an on-going tight rope act for those who would control it and those who would seek to prosper in it.
However, a satisfactory domestic economy depends very much on things over which Australia has no control, namely the performance of far bigger players in the global economy, and what other countries are prepared to pay for our exports – notably iron ore, liquefied natural gas and coal.
As for localised economic control, that tends to be limited by political will and capability to do what needs to be done. For example, significant speculation in housing activity propelled by low interest rates, easy credit, occurring in sync with one of the highest population growth rates in the developed world (around 1.5% annually), has created over-priced real estate.
Why things aren’t all that flash
Manufacturing, once a pillar of the economy, struggles to transition to profitable products. Tourism, service exports – principally education and health services – are expanding encouragingly, but are nowhere near enough to cover lost revenue from mineral exports.
And with non-financial debt more than 250% of GDP – a 50% increase in seven years – Australians are living with a ticking debt bomb. (The term non-financial debt refers to the aggregate of debt owed by households, government agencies, non-profit organisations, or any corporation that is not in the financial sector. This can include loans made to households in the form of mortgages, amounts owed on credit cards, bank loans to corporations, or corporate bonds issued to raise money.)
Household debt, is now more than 120% of GDP, among the world’s highest, and the rate of debt to income, five times what it was in the 1980s, is at an all time high of 194%. This is due substantially to stagnant real incomes, high house prices and associated mortgage debt.
In a populace ham strung by debt, retailers are understandably doing it tough. The sharpest drop in retail spending in the past four years has occurred in recent weeks.
Worrying private debt, deteriorating public finances, budget deficits reflecting an eroding tax base and mounting welfare costs -- exacerbated by an aging population – are in an unsettling mix where banks, accounting as they do for more than 200% of the nation’s GDP, could be in crisis should a housing bubble burst.
So what’s to be done?
High levels of debt limit any government’s policy flexibility, but Australia has problems way beyond that. It has a Senate no longer fulfilling its constitutional role as a House of Review. Seemingly a forum of intransigence for exercising the egos of independents and people in minor parties, it’s a roadblock to the flow of legislation.
There’s policy inertia and uncertainty in the House of Representatives in no small measure because it’s seen six prime ministers in eight years.
And board members of the Reserve Bank of Australia (RBA) are immobilized between a rock and a hard place. Lower interest rates haven’t stimulated the economy, inflation (at 1.8%) skulks below the bank’s preferred margin of between 2% and 3%, and a rate increase really isn’t an option. It would devastate an already rickety economy by sending to the wall an unacceptably high number of the nation’s already financially stressed borrowers.
Engineering a reduction in our dollar’s value is also not an option in current circumstances. It would reduce Australia’s capacity to borrow internationally, and our economy is already vulnerable, depending substantially as it does on foreign capital. Our foreign net debt tops 50% of GDP, much of the money being borrowed by banks to cover shortfalls between loans and domestic deposits -- and devaluation would potentially increase inflation dangerously so that there’d be pressure on interest rates.
So what’s to be done? Slogans like “Jobs, jobs, jobs”, “The Clever Country”, “The ideas boom”, and “A knowledge Economy” aren’t ever going to inspire voters or poll-shy politicians to work towards meeting the obvious need for tax and other reforms.
Instead of being mired in cults of personality, instead of bickering about issues of a much lesser priority than the economy, we need gusty politicians willing to educate their electorates about ways and means of achieving economic reform (that will of course be in everyone’s best long-term interests).
“Good luck with that”, you say?” Well, sure, we’d truly be a ‘”lucky country” if that were to happen, but unless there is fundamental change in the way politics is conducted in this country our luck will run out – and soon.
For more information, contact Macks Advisory on 08 8231 3323 or visit our office on Level 8 West Wing, 50 Grenfell Street, Adelaide SA 5000.
