Why Gen Y are holding us back

I don't really want to believe this, but the evidence is building.  Gen Ys might be responsible for the economic slowdown in Australia's non-mining States.  Let me explain.

Mortgage rates are low but mortgagees are worried

Over the last month some interesting data was released.  First, the Westpac/Melbourne Institute consumer confidence figures showed that mortgage holders are much less confident than they were. At the same time, the ANZ published some stats showing that housing affordability was its best for a few years.

This doesn't make much sense really.  Interest rates are low by long term standards.  Even though the banks put their rates up last year, and ANZ put theirs up a smidgem recently, the Reserve Bank cuts mean that home loan rates are lower now than they've been for a long while.  This isn't the sort of situation that should make home owners less confident.

House prices are down - maybe that's it

The best reason I can find for this loss of confidence is that house prices are down.  Hmm, that would make sense if they fell in 2012, but they didn't. House prices fell last year, and confidence is down this year.

I can't believe that everyone was blind to the falls in prices in 2011.  Every newspaper was talking about it - we all knew our house prices were sliding.

So what have Gen Ys got to do with falling confidence then?

My daughters are Gen Y, so like any parent I don't want to believe anything bad about these perfect angels, but then again, they've had it rather good!  Seeing the world from their point of view, over the last decade, they've had jobs, had a place to sleep, someone to bail them out and a booming economy.  Of course, they haven't always used those parental safety valves - but they've appreciated them being there.

Now, rather than the economy being a 10 out of 10, it's only an 8 out of 10.  For those of us old enough to remember 4 out of 10 economies, 2012 is pretty good.  yes, unemployment is pushing into the high 5s, but most people still have jobs, and even with issues in Europe, the world isn't falling apart.

For Gen Ys though, any whiff of a problem is scary.  Euro debt problems - aargh! China is slowing - Nooo! Tony Abbott says prices will go up because of the carbon tax - Yikes! If there is one thing that Gen Ys want it is certainty, and even though the fundamentals in Australia are strong, these are uncertain times.

You have shown a link to mortgagees

Gosh, you are right.  So let's get to that.  First of all, a lot of these Gen Ys are the ones who have bought the new houses in the 'burbs over the last few years.  They are loved up, and taken out their first mortgage, and suddenly have responsibilities.  You mean the bank wants me to pay this money EVERY MONTH?? So, it's perfectly understandable if the little dears are a bit worried about everything.

No wonder Gen Y parents look worried!

What about all those young renters, they aren't mortgagees? Well, no, but their parents are, and that's where the parental safety net kicks in.  The kids are getting worried, and what do you think they are going to do - that's right - put their hands out for free rent.  Not my kids of course, it's your kids. And that must make you worried, surely.

There we have it, because the world isn't perfect anymore and Gen Ys have to stand on their own two feet, its their parents who cop it.  Thanks kids!

Let me know what you think

Mark S

Paul Howes - somebody IS benefiting from the higher dollar

Today Paul Howes has come out criticising the Reserve Bank's charter, and claiming that "One of the real issues that our country has to come to terms with is that a high Australian dollar is good for nobody."

Sorry, but that's just plain wrong.  Here is some proof that the Australian dollar is good for somebody.

Overseas travellers have benefited

Since the appreciation of the Australian dollar, overseas travel has boomed.  There are nearly an extra 200,000 people a month travelling overseas now compared to 2008.

ABS: Short term resident departures

People buying televisions and computers have benefited

According to the latest ABS data, Audio, visual and computing equipment is down 18.8% in the last year (to Dec 2011).  That means major savings for anyone who wants to purchase these products.  It means that equipment that may have been too expensive for some people, has fallen into an affordable range.  It means that the rise in the Australian dollar has been good for somebody.

Australians buying property overseas

With the higher Australian dollar, that means that Australians can buy property overseas at a much lower price than previously.  It is now in the realm of the middle class income earner, with properties in Europe now attainable for $100,000. Property buyers lured to foreign affairs

Whether it is a lifestyle choice, or an investment, this means that Australians are owning real assets in other countries.  This means that the higher dollar is benefiting those buyers.  Those people are somebody.

Paul Howes - are the Unions as economically inept as Katter

The calls from Paul Howes to review the charter of the Reserve Bank are echoes of Bob Katter's crazy claims to sack the RBA board.  The well managed Australian economy through the Hawke/Keating, Howard/Costello and Rudd/Gillard/Swan years has been nothing short of stellar.  And the independence of the Reserve Bank with its charter and formal agreement with the Treasurer to maintain underlying inflation in a target range of 2-3% PLUS achieve full employment has been a critically stable influence throughout.

Whenever radical statements are made by any side of politics, people listen and get confused between the nonsense and the sensible.  We must remain economically rational.

Let me know what you think

Mark S

A little economic pain now is the perfect medicine

Deputy Reserve Bank Governor Philip Lowe gave a valuable speech to the Australian Industry Group yesterday.  You can read the detail at the RBA site here.

The implication of the speech is that the structural changes to the Australia economy are necessary, and will benefit us in the long run. Of course, he is absolutely right.

The recession ... I mean ... structural change we had to have

Just as Paul Keating honestly told us in 1990 that we were in the "recession we had to have", Philip Lowe is making it clear that the RBA sees this as the structural change we have to have.

Despite many comments by the Reserve Bank, and others, Australia's productivity is getting worse not better.

And what isn't so apparent to non economists is that the only way for Australia to sustain our improvements in our standard of living is to improve our productivity.

Productivity won't improve without significant change

At a business conference I was on some years ago, we were placed in groups on an oval, around a roped area with numbered squares scattered inside of it.  We had to find the fastest way to touch every square in order with each person only touching one square each time they entered the roped area.  We started by running into the area, touching a square and running out as quickly as we could.  This was pretty slow.  There had to be another way.  We had to be more productive.

Eventually, by looking at the other teams, we all figured it out - "straight line running".  Each person could run straight through the roped off area and touch their foot on one square.  This was much faster, and much more productive.  It was a very different approach.  It took significant change, and fast runners.  Yet, people who were agile but slow runners became less productive than they were when we all ran in and turned quickly to get out of the area. 

There were winners and losers, and everyone adapted as best we could to achieve a much better result.

Australia is going to have winners and losers too

Today, the most recent labour force data showed a small increase in unemployment.  This brought about a howl of concern from Joe Hockey and calls for lower interest rates from Bill Evans to stimulate the economy.  I had to shake my head.

Phillip Lowe explained that there would be winners and losers during this period of structural change.  To lower interest rates now would be to encourage people to keep running into the area and turning around inefficiently, rather than figuring out the equivalent of "straight line running". 

There actually has to be some pain, so change will happen.  There actually have to be some losers, so that they (and we) can all become winners.

Politically, it's a tough time to hold your ground

It's one thing for Phil Lowe to deliver the somewhat bitter pill to the country, and another for Wayne Swan is holding his ground on needing to deliver a surplus, or for Julia Gillard to resist the temptation to provide subsidies to those parts of the economy that are struggling through these changes. 

It's especially hard when the loss of 7 jobs, yes - 7, at Westpac's collection centre makes headline news (ok, so it was combined with 119 IT jobs going offshore, but the 7 jobs still made it into the headlines). The human story of even 1 person losing their job is so much easier and immediate for the average person to grasp that the much more important story that we will benefit from the structural change.

If you are reading this, or read Phil Lowe's speech, please evangelise.  More people need to understand that just a little medicine now will make us very strong in the future.

Let me know what you think

Mark S

Why does Bill Evans want Australia to have a recession?

Bill Evans, Westpac

Glenn Stevens, RBA

Back in July, Westpac's chief economist Bill Evans forecast the European economic problems would slow growth and result in a decrease in official interest rates by 100 basis points.  Nobody else was predicting that, and yes, he got it right when the Reserve Bank dropped rates by 25 basis points in November. But why does he insist on interpreting every statistic through the lens of their own prediction?

By sticking to the prediction that rates will decrease by a further 75bps, Bill Evans is forecasting the cash rate to fall to 3.75%.  That is well below a neutral level, so the only reason we will get a rate that low is if Australia falls into recession. The Reserve Bank is forecasting Australia's growth to continue at trend rate of 3-3.5%, so why does Westpac continue to talk up their prediction and talk down the economy?

Stick to your guns, but be fair

I respect Bill Evans for having a view, but recent economic data is indicating that the Australian economy is turning upwards.  As new data has arrived, it seems that Westpac are only looking for evidence to support their "rates down by 75bps" view, rather than taking an objective look at the figures.

Sure, if they believe that Europe is going to hell in a handbasket, then there is a case that Australia will fall into recession.  But you can't just dismiss positive data because it doesn't fit your theory.

My call is for stable rates

For what it's worth, I think rates will stay where they are now for some time. I don't see any change in December, and the green shoots of growth give me cause to think that by February our consumer economy will be looking OK.  Combined with the very strong mining sector, and my thought that the next inflation numbers won't be quite as low as the October figures, I'm tipping no change in February as well.

Of course, if Europe really does disintegrate, then that's a different story, but unlike Bill Evans, I'd be prepared to change my view if the data do change. (Oh, and I am putting my money where my mouth is!)

Whatever your view might be, you still have a responsibility to interpret new data objectively.  I don't believe that Westpac are doing that at the moment 

Let me know what you think

Mark S

Greek crisis reminds us to keep a steady ship

The crisis confronting Greece at present is a salient reminder that our country's central bank and government must do whatever is necessary to keep the economy on an even keel, over each economic cycle.

Last week, the governor of the Reserve Bank, Glenn Stevens, gave a speech to the Economic Society of Australia in Brisbane.  He made the important point that - although some parts of the economy had some slack, overall, the Australian economy is very strong.  As a result, monetary policy will be set to meet the needs of the whole economy.

Strong economic decisions allow us to succeed

This will always mean that there are some winners and some losers.  The alternative is to satisfy only the needs of a few small groups within the economy.  This failure to take appropriate decisions when they need to be taken is what leads to economic disasters such as those in Greece, Ireland, Iceland, and to some extent even in the United States.

When good economic decisions are taken such as movements in interest rates, careful government spending, or introduction of sensible policies like a carbon tax or mineral rent tax, these create an environment in which businesses and workers can be confident.

Ironically, the failure of the Greek economy may slow down Australia's enough to avoid an increase in interest rates until later this year.

Sensible decisions from the Reserve Bank, sensible taxes such as carbon tax and mineral resources rent tax, all assist in making Australia the world's leading western economy. 

Let me know what you think

Mark S

Bob Katternomics - you make me rofl

Bob Katter - in power???

Bob, Bob, Bob. You really are hilarious. Your suggestion yesterday to reduce our interest rates to the same level as the US! Hahahahahahaha. Sorry, that's the best belly laugh I've had all year.

OK, let's have some fun with this idea, shall we?

Bob Katter, hero of the rural man, and the old economy manufacturer, miraculously wins power. So then he claims a mandate to implement his policy of "simply lowering the interest rates to that of Europe or the United States.". What happens next? (After the markets stop rolling around on the floor of course)

Bob fires the Reserve Bank Governor and Board

Pauline on the RBA!! lol

First of all, there's no way an independent Reserve Bank Governor will implement Katternomics.  Oh no, Bob's first task is to reissue a new "Statement on the Conduct of Monetary Policy" overriding 18 years of stability.  There's no way a sensible Governor like Glenn Stevens will serve under the new principles of Katternomics, so he'll need to find a new guy to rubber stamp the brave new world.  But there's still the thorny matter of those other Board members.  No problem - Bob has a hand picked bunch of pro-tariff experts including Pauline Hanson.

The new Governor cuts the cash rate from 4.75% to 0.5%

What a great media story?

Average mortgage falls by $750 per month.

Well, the reality doesn't quite work that way.  Rather than slashing rates by 4.25%, the banks only cut by 3.5%.  Outrage! Why are the banks profiteering - Bob, you have to do something about it.

Borrow, borrow, bubble, bubble

After two years of consumers relearning how to save money, the Katternomics inspired new super-low home loan rates cause a frenzy.  The banks try as hard as they can to stop people borrowing money, what with their recent credit downgrades, but they can't help themselves and the new sport on the street is lending money for houses to people who may or may not be able to afford it.  But there aren't enough houses to buy, so house prices skyrocket.

The developers try their best, but they just can't build the houses fast enough.  Capital city house prices increase by 20% in a year.  Housing affordability is a thing of the past, and the natives are getting restless.  Fights break out at auctions, and by the end of the year, desperate wanna-be home owners are protesting in the streets.

Nobody wants to be a miner

With so much money to be made in building houses, the developers increase wages to keep workers in the building trade.  And so do the suppliers, and before you know it, Australia's inflation rate hits 7%.  It's the highest rate since 1990.

And now the mining companies can't get workers because they are all back in the east building houses.  So, the miners go to Bob and ask for an increase in migration.  But Bob wants jobs for Australians, so he knocks them back.  The miners can't deliver on their contracts to China, and now there's an international incident brewing.  What's more, Australia's mining revenue is below budget because of the wages issue, and the budget deficit is spiralling out of control.

Sure, the dollar is falling - because the economy is disintegrating

International investors aren't too keen on Katternomics, so money starts to flow out rather than in, and the dollar falls to 80c.  Bob's mates are thrilled - they are selling their wares overseas and making a killing.  The manufacturers don't do quite so well.  Even though they can compete a bit better on price, they haven't kept up with their competitors and can't break back into the overseas markets.

Now consumers all over the country are screaming.  Everything imported is going up in price, and unless you are a builder you aren't getting paid more than what you were before.  The budget surplus means that Bob has to reduce government spending so public servant numbers are being reduced.  The economy is starting to slow down as a result, and so we've got rising unemployment and inflation. You can't afford your housing and all you see on the TV is a big hat and a few happy farmers.

A Grimm Fairy Tale

Thankfully, the chance of Bob Katter ever having control of Australia's monetary policy is about the same chance of Pauline Hanson being elected Prime Minister.  And frankly, who knows what would actually happen under such a bizarre scenario - the picture I've painted might actually be an understatement of the debacle.  The only thing it really shows is how insane it would be to revert to a pre-1993 economic policy, or worse.

Thank you Bob Katter for giving me a great laugh.  For that is what you are - truly a laughing stock!

Let me know what you think (reaction buttons below)

Mark S