Monday, July 4, 2011

This very lucky country enjoys a good whinge

Another week, another batch of bad news, adding to the general impression things aren't going at all well in the economy. But the gloomy talk doesn't fit with the objective indicators. Will we snap out of it, or could we talk ourselves into genuine poor performance?

Undisputed winner of the Greatest Gloom award was the quarterly report of the Sensis business index. "Weak consumer spending and an uncertain economic outlook have caused business confidence in Australia to tumble to a low not seen since the global financial crisis ...," the report said, forgetting to mention it covers only small and medium businesses.

Business confidence fell from 44 per cent to 28 per cent, the second biggest drop in the index's 18-year history. Perceptions about the present state of the economy fell from plus 8 per cent to minus 7 per cent.

Support for the federal government's policies fell 16 percentage points to minus 41 per cent. Fully 53 per cent of small businesses said a carbon tax would have a negative impact on their business, while 41 per cent believed it would have no impact.

In earlier news, the Westpac-Melbourne Institute index of consumer sentiment fell by 2.6 per cent in June to its lowest level in two years. Comparing this June with June 2009 - when we were still expecting the financial crisis to result in a severe recession - people's expectation for general economic conditions are 98 now, whereas they were 85 then.

So the index's present weakness is explained by people's feelings about their own finances compared with a year ago. Whereas the rating was 82 in June 2009, today it's 76. And whereas feeling about the outlook for family finances over the coming 12 months was 114 then, it's less than 96 today.

Next we had a Newspoll survey which found 35 per cent of respondents expected their standard of living to get worse in the next six months, up 10 points on what people thought last December. The proportion expecting their living standard to improve dropped to just 12 per cent, with 51 per cent expecting it to stay the same.

You'll have noted that all this gloom is coming from surveys of how people feel. When you look at the objective indicators of the economy's performance you find a different story. While employment growth is slowing, we still have 260,000 more jobs than we did a year ago, most of them full-time. And unemployment remains at 4.9 per cent. The figures show growth is fairly well spread between the states, not just concentrated in the resource states.

Between the growth in employment and quite strong growth in wage rates, household disposable income rose by 8.3 per cent over the year to March. Over that period, the consumer price index rose by 3.3 per cent and the cost of living index for employees rose by 4.9 per cent. Does that sound like a squeeze on living standards to you?

We keep hearing about the weakness in retail sales, and it's true they grew by only 0.8 per cent in real terms over the year to March. But overall consumer spending grew by 3.4 per cent, a perfectly healthy rate.

The repeated claims we hear about how much difficulty people are having coping with the cost of living hardly fit with the ever-rising rate of household saving, which now exceeds 10 per cent of household disposable income.

It seems clear the economy's problems are more in the minds of consumers and business people than in their behaviour - though I'd be the last to deny that the way we feel can influence the way we act. Question is, why do so many people feel so bad and will this start having real effects?

Part of the problem may be a widespread lack of confidence in the Gillard government. Breaking down the Newspoll figures on expectations about the standard of living shows unsurprisingly that 45 per cent of Coalition supporters are expecting it to get worse.

More surprisingly, they're joined by 23 per cent of Labor supporters, with only 17 per cent expecting it to get better. Of course, the government's tactic of always echoing the punters' self-pity on the cost of living makes it its own worst enemy.

A related explanation is the undoubted success of Tony Abbott's scare campaign over a carbon price. Explaining the slump in consumer confidence, Bill Evans of Westpac says that "despite steady interest rates and falling petrol prices, concerns about the introduction of a price on carbon are rattling households". These concerns disproportionately affect low income earners. But you'd expect them to dissipate fairly quickly when, as seems likely, the issue turns from imaginings to reality in July next year.

The macro-economically literate understand the huge effect on the economy that's coming - and will come - from having our terms of trade at a 140-year high and from an amazing mining construction boom. They also understand that this income will spread throughout the alleged two-speed economy.

Is it possible the luckiest - and long the best macro-economically managed - country in the developed world could turn its prosperity to ashes?

I believe in the power of psychology, but I doubt it's that powerful. The resources boom will steam on no matter how the punters are feeling.

But it is possible we could go on feeling hard done by, even as we get richer and the economy's underlying structure gets stronger.

And if the non-mining economy hangs back in fear and confusion while the mining sector booms, at least that will make life a lot easier for the macro managers.