Already a subscriber?Australia’s economy has slowed to a crawl and the consensus among economists, politicians and pundits is that households are getting badly squeezed by the trio of higher interest rates, inflation and income tax.reveals some surprising and counterintuitive evidence. The sharemarket has surged to a record, companies reported a solid set of results in corporate profit season, household wealth is soaring to new highs and the unemployment rate is a low 4.1 per cent.
“Any household that owns a house and has a mortgage has done pretty well over the last three years,” Downes boldly declares. Over the medium term, the real value of people’s stock of debt will be lower than what they thought when they first took out the loan. If they manage to keep their head above water while servicing the mortgage and incomes keep rising faster than they were before the pandemic, then their balance sheets will be relatively healthy.Second, home borrowers are benefiting from large capital gains related to house prices and from the sharemarket jump pumping up superannuation returns.
“The decline in real household disposable income in the national accounts is misleading, and feeding into a misleading narrative and hype around the cost-of-living crisis. To be sure, Downes’ argument is a nuanced economic point that politicians won’t be making for a quick television or radio discussion. In the world of economics, it is aJBWere chief investment officer Sally Auld says Downes’ argument is broadly valid, “but the actual man or woman on the street doesn’t think like an economist in those terms.
“If wages don’t keep up to inflation, the real erosion of my debt hasn’t helped me,” he says. “In the long run, we’d expect wages to catch up to an inflation shock, but it may take time.“In the meantime, households cut consumption,” he notes. Real household consumption per capita fell by 2.4 per cent over the year.
The national economic trajectory suggests that negligible or negative growth, or perhaps even a technical recession are possible in the first six months of this year, before $20 billion of income tax cuts drip through from July and rates are potentially cut later in the year or in early 2025. Globally, services inflation is proving more sticky, partly because it is heavily influenced by labour costs which are elevated. Services inflation, combined with labour costs and productivity, will largely determine the actions of the RBA from here.