Short-term loss but long-term gain, says economy expertPosted on September 3rd, 2019 in Insights by AUSPACK
The economy is a mystical beast to many of us, but there’s no denying it plays a huge part in our personal and business lives.
Speaking at the 2019 AUSPACK Business and Industry conference in March, economist Stephen Koukoulas gave his thoughts on the way the Australian economy would go and what it would mean for consumer spending.
The nature of the Australian economy
Australia has an almost dreamlike economy in that we haven’t experienced a recession in the past 27 years and we even escaped the global financial crisis relatively unscathed.
Despite that, the economy here did stall slightly in 2018 and there’s indications that might continue.
Why is this? Stephen explained the nature of the economy by dividing into two parts: the cyclical and structural elements.
He said, “We must remember that there’s a cyclical element to the economy, as well as a structural one. What that means is that the cycle goes up and down. The key point that’s confronting Australia right now is that we’re in for a bit of a slowdown, the consumer side of the economy is the handbrake on what’s happening in the economy. That has big implications for the rest of the economy.”
“The other thing is the structural side of the economy. How well-formed are our business sector, are our consumers, to changes in the business cycle? Will we get through this business cycle in good shape? My answer is that we’re pretty good.”
“The structure of the economy is pretty good so while we’re going through this cyclical downturn, I’ve still got hope that the policymakers in Canberra, Reserve Bank and also the fact we’ve got a floating exchange rate will get us through this and that we’ll be okay despite a little bit of pain and difficulty.”
The short-term forecast
Over the next six or so months, Stephen predicted that the economy would be soft. A mix of a decline in wealth and a relatively low wages outlook would mean that people are likely to be cautious with their spending, making retail numbers weak.
Stephen said, “The first half of 2019 will be weak; the economy will not be firing on all four cylinders. But, is there light at the end of the tunnel? This is the thing we’ve got to think about. In a sense, all of us businesspeople, the next two months we’ll negotiate them, but more important is our business plan for the next one, two, three or perhaps more years — in the medium term.”
However, over 12-24 months, he predicted that we’re likely to see the economy bounce back if certain things, like the reserve bank interest rate, is set accordingly.
Major factors affecting the economy
Stephen identified two areas of potential concern for the economy: the housing market and global economies.
The housing market in Australia had already been in steady decline at the time of Stephen’s talk, having dropped around ten per cent with no sign of letting up. While some predictions had it falling as much as another 25%, Stephen reckoned that even another five per cent drop would see a lot of homeowners underwater, meaning they would struggle financially and their entire spending would be reduced.
He said, “House prices are falling, they’ve fallen about ten per cent from the peak. Reserve Bank research shows how consumers react to a change in wealth. If your wealth goes up by one per cent, you’ll change your household consumption by 0.07%. It doesn’t sound like much, but if it goes up 10% you’ll change by 0.7%, which is quite a bit in the economy. ”
“Which sectors get impacted when consumers change their wealth? The big one is motor vehicle sales. There’s a very, very strong link between how we change our purchases of cars when we’re feeling rich or we’re feeling less rich. Also for furniture, clothing, utilities — things that you’d say are somewhat discretionary.”
“Amazingly, there are a couple of things you spend more money on when you’re losing wealth. One of them’s alcohol, also food, communications and education. As house prices keep falling, consumer spending while be impacted minorly but negatively.”
On a bigger scale, the change in global economies could also impact Australia. Three areas of concern that Stephen mentioned were the impact of the America-China trade war, the Eurozone and Donald Trump’s impact on the American economy.
Three key takeaways:
- Although the economy might slow down slightly in the short-term, mid-term predictions are more positive
- The Australian housing market is likely to have a huge impact on consumer spending
- Other factors, such as the US economy, can have a major part to play on the Australian economy.
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