Daily BulletinDaily Bulletin

The Conversation

  • Written by Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

It seems like we haven’t had much good economic news lately. This was neatly summarised in the drop in national output (GDP) of 0.5% due to weak investment, both private and public.

Private investment is unexpectedly weak across most categories. New building investment fell by 11.5%, construction investment fell by 3.6%, while mining investment fell for the 12th consecutive quarter.

This was all reflected in a drop in business confidence and business conditions in the September quarter.

This is not what’s meant to happen when you have interest rates at record lows. Last week the RBA held the cash rate at the lowest ever rate of 1.5%.

The cash rate has been falling steadily from 4.75% since October 2011 – it has not risen once during this time. Falling interest rates are supposed to stimulate business investment and also consumer spending, yet this is weak too, growing at below trend.

Mining and non-mining investment

image Mining and non-mining investment. Australian Bureau of Statistics

The puzzle can be explained. When interest rates get very low they start to have the opposite to their intended effect on both households and businesses.

Households that are either in or approaching retirement have to save more to achieve their target nest egg of savings. This depresses consumption spending. No other than the RBA governor at the time, Glenn Stevens, acknowledged in a speech in April that low interest rates were a big problem for savers.

The arithmetic is simple. If you as a couple want to generate a comfortable income of $60,000 in retirement, you will need about $900,000 at an annual net return of 5% (after fees), if you are willing to run your capital down to zero after 25 years. You would obviously need more than that if you want to leave some capital at the end.

But 5% annual return is now looking very unlikely on a sustainable basis, given a low-risk asset allocation and a world of ultra low interest rates. About 3% (net) is more likely. In that case you will need roughly $1.1 million even if you are prepared to run your capital down to zero in 25 years. This isn’t even including any extras like a short overseas holiday once a year.

People understand this and are saving more to build a bigger nest egg, given such low returns. Other households that are building their wealth are tending to use lower interest rates to borrow in order to buy property.

Their consumption spending is more in the form of interest payments on their debts, rather than purchases of goods and services. The ratio of housing debt to household income has increased over the past three years from 166% to 186%.

And lower interest rates keep the Australian dollar lower than it would otherwise be. That makes overseas purchases more expensive, such as holidays and cars.

New building investment

image New building investment. Australian Bureau of Statistics

As for businesses, why should they feel more confident about future sales revenue when the RBA thinks the economy needs stimulating, and when they see weak household consumption and other businesses reluctant to invest?

The apparently good news to come from the September quarter national accounts is actually dangerous. Australia’s terms of trade rose by 4.5%, due to mineral price rises such as iron ore. This feeds into export income and in turn eventually into company profits and tax revenue. Therein lies the danger.

The last terms-of-trade boom, from 2000 to 2010, released rivers of tax revenue. This is not what Australia needs right now because it will not last. It will only allow our politicians to postpone the necessary long-term cuts in government spending. Even worse, it might encourage them to hardbake new spending programs that we can’t afford in the long run.

Instead, we need to remember what Nobel-prize-winning economist Paul Krugman famously said:

“Productivity isn’t everything, but in the long run it is almost everything.”

Sustained improvements in average living standards can only come from improvements in productivity. We know how to improve productivity, we just can’t muster the political will to do it.

We have become far too concerned with how to share a national economic pie that is in danger of shrinking, particularly in per capita terms, than in growing the pie.

Authors: Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

Read more http://theconversation.com/its-not-just-a-drop-in-gdp-that-should-worry-us-70203

Coalition maintains Newspoll lead federally and in Queensland; Biden's lead over Trump narrows


How the shady world of the data industry strips away our freedoms


20 year old Aussie marketing genius helping billion dollar household brands


The Conversation


Did BLM Really Change the US Police Work?

The Black Lives Matter (BLM) movement has proven that the power of the state rests in the hands of the people it governs. Following the death of 46-year-old black American George Floyd in a case of ...

a Guest Writer - avatar a Guest Writer

Scott Morrison: the right man at the right time

Australia is not at war with another nation or ideology in August 2020 but the nation is in conflict. There are serious threats from China and there are many challenges flowing from the pandemic tha...

Greg Rogers - avatar Greg Rogers

Prime Minister National Cabinet Statement

The National Cabinet met today to discuss Australia’s COVID-19 response, the Victoria outbreak, easing restrictions, helping Australians prepare to go back to work in a COVID-safe environment an...

Scott Morrison - avatar Scott Morrison

Business News

20 year old Aussie marketing genius helping billion dollar household brands

Australian digital marketing agency, Co Media, founded by 20 year old marketing genius Lucas Cook, is making its mark on the world stage by gaining a number of high profile clients and quickly b...

News Company - avatar News Company

5 Reasons to Choose Pipe Relining

There’s nothing like a damaged pipe to stress you out and keep you up throughout the night. Depending on the extent of the damage, a pipe repair can be a complicated and time-consuming process. ...

News Company - avatar News Company

Reinventing The Outside Of Your Office

Efficient work is a priority in most offices. You need a comfortable interior that is functional too. The exterior also affects morale. Big companies have an amazing exterior like university ca...

News Company - avatar News Company

News Company Media Core

Content & Technology Connecting Global Audiences

More Information - Less Opinion