(Source: Angus Gluskie, Whitefield Ltd, August 2019 quarterly report)
Australian business conditions remain mildly positive across the government, healthcare, financial, business services, infrastructure, industrial and mining sectors.
In contrast to these positives the economy also faces some meaningful headwinds:
- The discretionary retail sector continues to soften as a result of the uptake in online shopping, and the perennial decline of out-of-fashion brands in favour of more novel offerings;
- Multi-dwelling residential construction is materially lower than its prior bullish levels;
- Retiree incomes continue to be undermined as a direct consequence of low interest rates;
- Consumers and businesses are struggling with the high asset prices and high debt levels that are the by-product of ultra-low interest rates;
- The continuing trade dispute between the US and China is disrupting business activity and planning
A resolution if the US-China dispute would certainly be viewed favourably by global investment markets – if that can be achieved. The problems created by ultra-low interest rates however are likely to be a more persistent issue.
It should be evident to policy-makers that ultra-low interest rate policy has failed to boost growth in economies where it has been used, and in many cases it has exacerbated the underlying problem. Lowering rates only assists economic growth if it flows into greater consumption and increased business investment. The current ultra-low rate policy is instead inflating asset prices and debt levels, raising consumer caution and in turn lowering incomes and consumer spending and eroding business confidence.
Strategically, a better approach may be to implement fiscal policies that encourage wage growth while concurrently (but slowly) raising interest rates. This combination would boost retiree incomes, lower debt levels, decrease consumer caution and increase consumer spending while protecting asset process.
The Government’s July 2019 tax cuts represent an initial constructive step in improving consumer incomes and we would strongly endorse additional initiative to support and foster wage growth, particularly if this can be accompanied by monetary policies that prevent undue asset price inflation.