Sunday Sanity Break, 10 March 2019 – Income recession upon us
The PM is not amused, but sadly for the rest of us we are in the third income recession since the real 1990/91 recession blighted lives. An income recession is defined as real GDP relative to population, ie GDP relative to population. In the real recession of 1990/91 real GDP fell for at least 2 quarters and unemployment reached 11 %. Measured properly, the rate of unemployment plus underemployment was nearer 20 %, in Prime minister Keating’s ‘recession we had to have’.
Now, like other developed nations, our economy is slowing, strongly influenced by the drought over most of the country and savage rain and floods on the deep North. (Now the old idea of dams in the North and long pipes to send the excess water South is being discussed.) Strong falls in house prices and low wage increases make consumers careful. The economy is being propped up by surprisingly strong commodity prices but China’s slowing should fix that shortly. A real recession is likely soon, but Australia is already in an income recession.
It is no longer certain that Bill Shorten’s Labor party will win the May Federal election, but still they are odds on to do so. Liberal ministers are fleeing the parliament like rats from a sinking boat. The Liberal leaders, Scomo and Josh, have on their side a budget surplus, the promise of income tax cuts and a greater reputation for a strong economy and budget rectitude. Labor has the promise of $200 billion worth of new taxes, largely from the rich and merely well-to-do.
Except for Hawke and Keating, other recent Labor governments have made a mess of governing. Think Whitlam and Rudd-Gillard-Rudd. Few voters do their analysis in such historical form. It will be clearer once the real election begins.
Recent Australian economic policy has not been great. To be sure, it seems likely that Treasurer Josh will be able to deliver a near balanced in budget for 2018-19, and promise a small surplus for 2019-20, provided of course the Coalition is returned. If Labor is elected large tax hikes may increase surplus, but Labor will be unable to avoid giving money to its followers.
The RBA should have gotten cash interest rates to at least a neutral position during the late lamented housing and commodity booms. If the economy remains depressed there is now very little room for rate cuts.
So the Australian economy has little scope for budget tightening – and so little room to repay debt – and little room for interest rate cuts.
(Curiously Governor Philip Lowe once wrote about the virtues of raising interest rates if asset prices were rising even if goods and service prices were stable. But during Australia’s house price boom he stuck to interest rate stability but now says he may reduce rates if house prices keep falling. This a distinct anomaly that needs explanation. The greatest historical anomaly is when near stable USA goods and services inflation was combined with booming share prices, as it was in the 1920s. The US Fed only increased cash rates very late in the decade, not wishing to be blamed for ending the boom. Australia is now in a severe slowing, probably a nasty recession, a victim of a similar anomaly.)
Fiona Prior visits ‘After Nature’, the life work of Australian artist Janet Laurence now showing at Sydney’s MCA. More here.
Australia’s one day cricket team has taken their first win in India. Captain Finch has finally made a heap of runs and took a fine outfield catch to end India’s fightback. Khawaja’s century was another return to form and Maxwell performed well at number 3.
The Wimmin’s soccer team has had three fine wins under their new coach. Both wimmin’s soccer and men’s cricket face world cups and now it seems both have some real chance.
Image of the week
To be provided