Economy returning to normal?

Households know what the market and governments don’t: the post-GFC world is different

We are now a decade from the global financial crisis and despite the huge ruction it caused to financial and economic systems around the world, governments, businesses and investors continue to act as though nothing has changed.

However, one need only look at retail spending to realise households know our economic world is no longer what it once was.

In the middle of 2008, things were looking good so long as you didn’t look too far ahead. But the economy was very different to the one we have now.

At the time, 45% of all people over 15 years of age were working full-time; this is now 42.4%. That may seem like a difference of just a few percentage points, but it is the equivalent of nearly 520,000 fewer people being employed on a full-time basis.

Back then, the cash rate was at a 12-year peak of 7.25% as the Reserve Bank was worried about rising inflation. Now it’s at a record low of 1.5% as the Reserve Bank wonders just when inflation will pick up.

The search for inflation – and the relative return to normal of interest rates and wages growth – is something that, bizarrely, investors, and indeed the government, feel is just around the corner because of the belief that the way things used to be before the GFC is the way things still are and will remain in the years to come.

We see this in the government, with its belief that the best way to address low household income growth is to cut company tax rates. We see this in the market, with its ever desperate, ever incorrect predictions that interest rates are going to start rising soon.

In the pre-GFC days, if we had experienced 14 straight months of increasing full-time employment (in trend terms) as we have now, we would also have been expecting inflation and wages to be rising, and the Reserve Bank increasing interest rates to cool the economy down.

And thus, despite next to bugger-all signs of inflation growth, the markets have continually sought to believe the old story still holds.

In September last year, the market was predicting the cash rate would be raised twice to 2% by February next year. Analysts at ANZ and National Australia Bank even expected rates to rise twice this year.

Then things calmed a bit – the reality the market expected to see didn’t occur and by the end of November it was factoring barely a better than 50:50 chance of any rate rise this year.

Then, as investors and speculators do, they once again got excited – surely things were on the improve, surely things were going back to the way they were – look at that employment growth! And so by the end of last month, once again the market predicted two more rate increases to 2% – not by February 2019 but this time by May 2019.

And then on Thursday night, the governor of the Reserve Bank, Philip Lowe, gave a speech in which he told the audience the RBA’s estimate for underlying inflation was for it to remain below the 2.5% midpoint of its target range for “the next couple of years”.

He said that if employment continued to improve and inflation returned to near the target-range midpoint, “at some point it will be appropriate for interest rates in Australia to also start moving up”.

“At some point” – central banker speak for “don’t hold your breath”.

And just like that, once again, investors, speculators and analysts were forced to realise that things were not like they used to be, and the likelihood of any rate rise once again fell below a 50:50 chance. ANZ announced on Friday that it no longer expected a rate rise this year.

And all the while, Australian households have been showing everyone that things are no longer the same and must be wondering why anyone would think differently.

This week, the retail trade figures for December were released and they showed that total retail spending in 2017 was just 2.7% above the 2016 figure – the worst calendar year increase since 2011.

It used to be the case that Australians would spend about 6% more each year on shopping. In the 26 years up to 2009, total calendar year retail spending grew by less than 4% only twice. In the eight years since then, it has been above 4% only twice.

The Reserve Bank is plainly aware of what is happening. In its latest statement on monetary policy, released on Friday, it noted that the decline in spending on “discretionary categories, such as hotels, cafes & restaurants and recreation & culture, could indicate some increased pressure on household finances”.

Meaning, yes inflation is low, but so low is income growth that households have to cut back on spending on fun things – to pay for essentials such as energy, rent, education and health.

The central bank also noted that while employment growth had been strong over the past year, there was little sign of it translating into an income boom.

It said “the gap between the lower wages of those entering into employment and those already working has widened”. In a big sign that things have changed, those coming into the workforce are being paid relatively less than new workers used to be.

And so as we get into the 10th year since the GFC, the “new normal” of weak or non-existent household income growth remains in place. And governments and markets might do well to ponder why they believe things are returning to normal when households are clearly telling them that they are not.