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The Australian economy’s self-fulfilling prophecy problem

  • January 20 2020
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The Australian economy’s self-fulfilling prophecy problem

By Grace Ormsby
January 20 2020

The Reserve Bank’s communication style is part of the problem plaguing Australia’s economy at present, a new report has flagged, despite the downturn’s measurable impact able to be attributed to other factors such as drought and the recent housing downturn.

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The Australian economy’s self-fulfilling prophecy problem

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  • January 20 2020
  • Share

The Reserve Bank’s communication style is part of the problem plaguing Australia’s economy at present, a new report has flagged, despite the downturn’s measurable impact able to be attributed to other factors such as drought and the recent housing downturn.

RBA

According to Deloitte’s Access Economics Business Outlook for the last quarter of 2019, there are three major threats affecting Australia’s economy. 

For a little while, “Australia has been battling the dual demons of drought and housing-related negatives, including cautious consumers and a downturn in housing construction”, noted the Business Outlook’s lead author, Chris Richardson. 

But now there’s a third threat, according to Mr Richardson, which he highlighted as “cratered confidence among consumers and business”.

“Our crumbling confidence has a few causes (and this summer’s bushfires don’t help), but the Reserve Bank hasn’t covered itself in glory as it communicates with the public.”

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He said that has left confidence “worse than the economy itself, which in turn risks becoming a self-fulfilling prophecy”. 

And while there are positives, Mr Richardson countered – such as tax cuts, lower interest rates, a lower Australian dollar and a rebound in housing prices – it does leave Australia locked in to slow growth. 

Despite this, “it doesn’t spell the disaster that the punters are fearing”, according to the consultancy firm’s partner. 

“We are on course to keep muddling through the impacts of drought, housing-related weakness and scared consumers,” he observed.

As a result, “the nation’s growth won’t lift all that much from today’s decade low, and we don’t expect unemployment to drop or wages to accelerate through 2020: we’ll be comfortably trading water rather than roaring into recovery”. 

The partner went on to flag that Australians should expect further rate cuts in the coming year. 

“Interest rates are really low,” Mr Richardson observed, “and that’s where they’re set to stay for some time”. 

“Inflation is larger harder to generate than it used to be,” he commented.

That means interest rates are being set at levels aimed to get inflation going again.”

Mr Richardson explained how the Reserve Bank wants the Feds to “pitch in and help, but, absent a bigger crisis, that doesn’t look likely”. 

“So, the Reserve will cut rates twice more, partly as the economy is still weak, but mostly because inflation is so stubborn.”

Despite this, he said he expects the RBA not to go down the quantitative easing route to restart the economy, calling it “a big step”. 

“And, like Hotel California, it’s hard to leave,” he continued. 

Since the report’s release, Labor MP and shadow treasurer Jim Chalmers has attacked the government’s management of the economy over the past seven years

nestegg has also delved into the surplus account expectations for the coming year, as outlined by the report. 

Read more on Australian economy here.

The Australian economy’s self-fulfilling prophecy problem
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About the author

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Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

About the author

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

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