Despite the monumental shift in the World economy and the considerable distance we still have to travel to recover and restructure, the Australian media, Reserve Bank and the population as a whole has decided to put their heads in the sand. The overwhelming sentiment is that Australia has in some way missed the worst of the economic crisis and is powering ahead.
The decision of the Reserve Bank to lift interest rates from 3% to 3.25% today is testament to this way of thinking. They have shown that they stuck in the past, relying on old economic indicators in making their decisions. They have displayed no understanding of the “new economic normal” and in doing so have sent a very dangerous message to both business and households.
One of the facts that most people are not aware of is that Australian personal wealth has been impacted harder than almost any other developed country in the World. Australians have lost around 27% of their personal wealth since the economic crisis began. Whist Australia hasn’t suffered with home foreclosures and the lending freeze in the same way as countries like the United States we have certainly been significantly affected.
Economic indicators such as unemployment statistics and job ads only tell part of the story with 10-15% of the Australian workforce being “underemployed”. Underemployment is like the “silent cancer” in our economy because the major focus of reporting is the “jobless” or unemployment figures. Those that are working less than they need or want to fall under the radar and the financial pain of the “underemployed” throughout the country is significant.
Australia’s population has grown by around half a million people in the last 12 months yet our economy has only narrowly escaped a technical recession. Total household debt is still at an all time record level of more than $3.5 trillion AUD and both businesses and households have significant pain ahead as they embark on a very necessary “debt deflation” process.
The First Home Owner Grant has been decreased and will be gone by the end of the year. It has stimulated the lower end of the real estate market throughout the crisis and I believe has artificially increased housing prices at the $500,000 level. Like any bubble it must correct and the pain of that correction is ahead of us rather than behind us. The removal of the Grant will decrease activity in the housing market – something that increasing interest rates will not resolve.
With so much uncertainty domestically and throughout the World the Reserve Bank has made the wrong decision in increasing interest rates. The Australian economy is fragile and this is not the time to turn off life support.
By signaling their intention to raise rates the Reserve Bank has alarmed business owners who rely on funding to provide their goods and services. Many will be forced to increase prices to fund their additional expenses. This is something that will be felt throughout the entire economy – those hurting already will again feel even more pain. Much of the pain and fallout of this economic crisis is still to come.