27/06/2017 - 12:25

Asleep at the wheel as perception gap widens

27/06/2017 - 12:25


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ANALYSIS: The business sector’s view of the future and that of consumers are heading in different directions.

Australia’s household debt as a percentage of GDP is the highest in the Asia Pacific, while consumer confidence is down to a level last seen in mid-2015. Photo: Stockphoto

Crewless ships and driverless trains may seem a world away from the economic data produced by government statisticians and bank economists, but there are only a few degrees of separation between them, and the connection starts with the downbeat mood of consumers and retailers.

The idea of operating ships without a crew surfaced in Denmark and is scheduled for a trial in neighbouring Norway next year on a 16-kilometre trip by a small vessel carrying fertiliser, with the aim being to replace 40,000 truck trips a year.

Longer voyages, such as those made by iron ore carriers from Western Australia’s north to Asia, will require changes to maritime law. However, the attraction of cutting ship-operating costs by 50 per cent, which is what a full crew represents, will be too much for ship owners to ignore.

The same hard-nosed financial logic behind the concept of ghost ships underpins the experiments with driverless trains and trucks in the Pilbara, where people are being replaced by computers and the disconnect between business and consumers can be seen up close.

In the pursuit of productivity and increased profits, business is driving the shift towards workplaces that employ fewer people, while those with jobs are not receiving much in the way of pay increases (if anything all).

That’s one of the reasons why recent measures of economic conditions in Australia have produced different results, and is possibly behind a claim last month that Perth’s central business district is ‘dead’.

In June, former mayor of the City of Vincent and recently elected MLA for Perth, John Carey, said the City of Perth’s strict regulations were behind the lack of lively activity in the city.

However, another reason is that consumers in Western Australia, like much of the rest of the nation, are keeping a tight grip on their wallets. Unlike big business, there is a sense among average workers that they have been going backwards for the past few years – even as business recovers from the shock of the GFC.

Worse still, with interest rates slowly rising on home loans as credit conditions tighten, every consumer with a home loan is battening down the financial hatches.

Two of the recent economic measures worth a closer look are being seen as unquestionably optimistic – business conditions are reported to be strongly positive, and the unemployment rate has fallen. In the latter measure, WA is doing better than most states with a drop from 5.9 per cent in April to 5.5 per cent in May – the same as the national unemployment rate.

A third measure – consumer confidence – has put the retail sector on alert because it has retreated to a level last seen in mid-2015.

There is a significant gap between how the business sector views the future and how consumers see it, some of which can be explained by high household debt levels and the drive by business to boost productivity through automation and greater use of the internet.

Westpac Bank, in its analysis of a survey conducted by arch-rival National Australia Bank, noted that while business conditions had eased slightly in May to a measure of +12 (where zero is neutral and conditions are measured above or below that line) compared with +13 in April, they were still strongly positive and well above the long-term average, since 1989, of plus one.

Encouraging as the survey of business conditions might be, there was a sting in the tale in terms of how consumer confidence and the better-than-expected unemployment numbers were juxtaposed with lacklustre consumer spending and weak wages growth.

In other words, more people might be in work but they are not enjoying the same buoyant conditions as business; and they are not receiving pay rises, as the threat of increased mortgage payments hang over their heads.

Another measure of consumer confidence, taken by ANZ Banking Group in conjunction with the Roy Morgan research centre, shows that consumer confidence stalled in mid June after a period of increase.

Household expectations, a measure of what families are likely to spend in shops, dropped a sharp 5.2 per cent in May, with a measure of future economic conditions falling by 2.6 per cent.

The Melbourne Institute, in conjunction with Westpac, picked up the theme of declining consumer sentiment in its June survey, which recorded a sentiment score of 96.2, below the 100 level considered a neutral measure.

The latest measure represented a fall of 1.8 on the May figure and means the consumer sentiment index has been below 100 since Christmas.

Westpac senior economist Matthew Hassan told The Australian newspaper the index was now back in: “Firmly pessimistic territory, with the June reading the weakest since the Reserve Bank’s 2016 interest rate cuts.”

He also noted how the poor consumer sentiment reading contrasted with upbeat business surveys showing conditions to be the best since before the GFC.

Explaining the seeming misalignment of business conditions, the official unemployment rate and consumer confidence is not easy, because issues that can influence household sentiment include pressures that are hard to measure, such as domestic political trends and worry about global security issues, including the rising tide of terrorism.

Consumers are particularly worried about their high personal and mortgage debts, which have ballooned during a period of ultra-low interest rates.

A graph from HSBC Bank highlighted the Australian debt dilemma, with household debt as a percentage of gross domestic product now ranked as the highest in the Asia Pacific, with the graph (above) comparing Australia with New Zealand, Malaysia, Thailand, South Korea, Singapore, Hong Kong, Japan, China, Indonesia, the Philippines and Sri Lanka.

Being top dog in the world of debt is not a prize any country wants to win.

Reserve Bank governor Philip Lowe sees household debt as a significant impediment to future economic growth, while also making the country less resilient to future shocks.

Dr Lowe argues that wage rates need to catch up with high household debt levels, but there is no sign of wages growth doing much better than the current rate of 2 per cent annually.

Households also do not appear to believe official unemployment statistics, with a large majority expecting unemployment to rise, not fall, as the May data revealed.

Why there should be such a disconnect between how business views the future and how consumers see it is an important question, because it is possible that Australia’s families are behaving in the same way as a canary in a coal mine – they smell danger, and their lack of confidence should be seen as a warning.

On a far bigger scale, there is also a deep-seated worry about whether the periods of strong growth that came after WW2, and then more recently driven by China’s industrial revolution, have come to an end.

US investment bank Citi tackled the question of slow growth in a report last month that addressed the question of a slowing global economy, with a key point being that population growth has slowed dramatically over the past 55 years.

“The historical drivers of growth have been demographics, rising income, productivity and innovation,” Citi said.

“In essence, more people, more money, cost efficiencies and new items have driven demand for products and services over the year – no-one even knew they needed a smartphone a decade ago, and this was true for cars 100 years ago.

“But, current expectations for future growth are quite low, driven by fears around an ageing population, the GFC, and the slowing pace of expansion in emerging economies.”

Among the numbers to jump out of Citi’s gloomy global report, titled ‘Growth, growth, my kingdom for growth!’, is the near-halving of worldwide population growth from an annual 1.9 per cent in 1963 to 1.1 per cent in 2017, and 0.7 per cent in the US, the world’s biggest economy.

Productivity, of the sort being pursued by innovations such as ghost ships and driverless trains, is also not rising as had been widely expected, and perhaps consumers can sense what Nobel Prize winning economist Robert Gordon has observed as the end of a period of rapid growth.

Professor Gordon, from Northwestern University in Chicago, goes as far as to forecast that global growth could decline to less than 1 per cent a year thanks to factors such as high debt levels.

There is no easy explanation for the divergence of opinion between how business and consumers see the future, but it is important and could be signalling a period of significant social change with the potential for significant economic repercussions.


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