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You can hear it. The economy is slowing. You can hear it as business people sit around cafes comparing notes, tallying up ways their companies can make cut backs: air fares, new stgelopments, expansion plans… even stationery. At home, families are looking at areas to slash household spending: entertainment, petrol, holidays, whitegoods, utilities, groceries…

The Reserve Bank has been able to change people’s attitudes with its flurry of interest rate hikes over the past six months. The flow-on effects from the US sub-prime mortgage crisis have squeezed credit, sent the sharemarket into a series of volatile gyrations, hammered vulnerable stocks, and sent short-sellers on their merciless hunt for prey.

The $A is high but so is petrol. We continue to borrow on plastic but are getting stung by increasingly higher interest rates. Home affordability is causing a massive split between old and young: those with homes and those who fear they can never save enough to put a deposit on one, let alone pay it off.

We’re seeing a Jekyll and Hyde economy: one where inflation continues to bubble away as the shortage of skilled labour promotes higher wages. Inflation is also being fuelled by high petrol prices but the strong $A reduces the price of imported goods. Conversely, the strong dollar hurts exporters (particularly those trading in greenbacks who find their profits buy less when converted back into Aussie dollars). Manufacturers are losing skilled workers to the resources sector where wages are better.

And then there’s droughts and flooding rains – northern Australia receives some of its heaviest downpours in almost a century thanks to the La Nina weather pattern while southern Australia is still in the grip of a brutal drought.

Meanwhile, the sharemarket is facing another kind of gothic nightmare. Local shares are being savaged by recessionary fears in the US coupled with the threat of higher interest rates at home. Short-selling has triggered demands for increased market regulation, calls for companies to stick stringently to continuous disclosure requirements, and reminders that predatory hedge funds and their stock lenders help boost liquidity in the market. The downside is that Australian companies are now being forced to fire-sale assets to stave off disaster.

Plus there are questions about the Australian banking sector – just how exposed is it to the sub-prime disaster and its flow-on effects. And how exposed will their loan books prove to be to business and mortgage defaults here.

It’s worth remembering that it’s 20 years since the last big sharemarket crash – a new generation of managers are in charge of massive piles of other peoples’ money, wondering how to produce stellar returns in such a two-faced economy. And it’s 18 years since interest rates peaked and triggered a recession – again, there are many people running investment desks in major financial institutions who have only read about the official cash rate peaking at 17.5 per cent in January 1990 – a move revealed the Reserve Bank had lost sight of the economy and kept relying on outdated data to boost rates way beyond what was prudent, triggering a savage recession.

Now, the inflation data pondered over by governor Glenn Sevens and his fellow directors at the Reserve Bank is still just a snapshot of what has already happened. It can take months for high interest rates to bite into the economy and for the resulting data to reveal the impact they have had. Stevens needs to listen to the economy and hear how it’s beginning to shift down in gear, not rely on backward-looking inflation data alone. Fortunately, Stevens and Treasury secretary Ken Henry are unlikely to repeat the errors of 1990.

Finally, Treasurer Wayne Swan must help the Bank by producing a May Budget that doesn’t pump inflation further despite the election campaign promises that were made. There probably is scope to maintain the promised tax cuts, but the Budget should set a tone of fiscal responsibility that can underline the mindset the Bank is trying to promote.