Monday, June 20, 2022

Economic times are tricky, but they're far from 'dire'

It’s a funny thing. The easily impressionable are packing down for imminent recession, while the economic cognoscenti are fretting that the economy is “overheating”. Unfortunately, the two aren’t as poles apart as you may think. Even so, both groups need to calm down and think sensibly.

There was much talk of recession last week as the sharemarket dropped sharply. We dropped because Wall Street dropped. It dropped because the thought finally occurred that if the US Federal Reserve whacks up interest rates as far and as fast as the financial markets are demanding, high inflation might be cured by putting the US into recession.

It’s true that when central banks try to cool an overheating economy by jamming on the interest-rate brakes, they often overdo it and precipitate a recession.

But a few other things are also true. One is Paul Samuelson’s famous quip that the sharemarket has predicted nine of the past five recessions. As the pandemic has taught us to say, it has a high rate of “false positives”. Assume that a sharemarket correction equals a recession, and you’ll do a lot more worrying than you need to.

In truth, the chances of a US recession are quite high. But another truth is that the days when a recession in the US spelt recession in Australia are long gone. Our financial markets are heavily influenced by America, but our exports and imports aren’t. Remember, during our almost 30 years without a serious recession, the Yanks had several.

China, however, is a different matter, and its continuing strength is looking dodgy. But even though a Chinese recession would be bad news for our exports, of itself that shouldn’t be sufficient to drop us into recession.

That’s particularly so because much of the blow from a drop in our mining export income would be borne by the foreigners who own most of our mining industry. It would be a different matter if modern mining employed many workers, or paid much in royalties, income tax and resource rent tax.

Remember, too, that contrary to what Paul Keating tried telling us, all recessions happen by accident. The politician who thinks a recession would improve their chances of re-election has yet to be born. And few central bank bosses think a recession would look good on their CV.

They occur mainly because an attempt to use higher interest rates to slow an overheated economy goes too far and the planned “soft landing” ends with us hitting the runway with a bump. It follows that the greatest risk we face is that the urgers in the financial markets (the ones whose decision rule is that whatever the US does, we should do) will con the Reserve Bank into raising interest rates higher than needed.

But I’m sure Reserve governor Dr Philip Lowe is alive to the risk of overdoing the tightening.

He mustn’t fall for the claim that, because a combination of fiscal stimulus and an economy temporarily closed to all imported labour has left us with a record level of job vacancies and rate of labour under-utilisation of 9.6 per cent, the economy is “red hot”.

Is it red hot when almost all the rise in prices is imported inflation caused by temporary global supply constraints? Or when the latest wage price index shows wages soaring by 2.4 per cent a year and all the Reserve’s tea-leaf reading shows wages rising by three-point-something? And (if you actually read it right, which most of the media didn’t), last week’s annual wage review awarded the bottom quarter of employees a pay rise of 4.6 per cent, not 5.2 per cent.

Is it red hot when employers are reported to be offering bonuses and non-economic incentives to attract or retain staff? That is, when they aren’t so desperate they feel a need actually to offer higher wage rates. Or is it when oligopolised businesses are still claiming they can “afford” pay rises of only 2 per cent or so and, predictably, there’s been no talk of strikes?

Is an economy “overheating” and “red hot” when real wages are likely to fall even further? That is, when the nation’s households will be forced by their lack of bargaining power to absorb much of the temporary rise in imported inflation (plus, the delayed effects of drought and floods on meat and vegetable prices)?

And, we’re asked to believe, households will be madly spending their $250 billion in excess savings despite the rising cost of living, falling real wages, rising interest rates, talk of imminent recession and falling house prices. Seriously?

No, what’s most likely isn’t a recession, just a return to the weak growth we experienced for many years before the pandemic, thanks to what people are calling “demand destruction” by our caring-and-sharing senior executive class.