RBA’s rate conundrum as economy picks up in all states except Victoria

RBA governor Michele Bullock during a press conference following Tuesdays decision to keep interest rates on hold. Picture: Nikki Short/NewsWire

Reserve Bank governor Michele Bullock should prepare herself for a shock.

Around the RBA board table are clearly a number of directors who believe interest rates will need to rise, and Bullock reflected their view by stating the board considered raising interest rates at this week’s meeting.

What Bullock and her board did not know was the Australian economy in all states, but one, has turned markedly upward in the last three weeks.

RBA governor Michele Bullock during a press conference following Tuesdays decision to keep interest rates on hold. Picture: Nikki Short/NewsWire

In April and May, demand from the 70 per cent of people not under mortgage or rent stress was flat and drifting downward.

But come June, there has been a significant surge in demand in all states except Victoria. Many are reporting sales rising above five per cent, which represents a significant movement. Before looking at the reasons for the sudden national surge and the implications we must, of course, isolate Victoria which is actually falling back.

Our second most populated state has elected a government whose inability to govern properly has caused Victorians to act differently to the rest of the nation. And they are stuck with that government for another two years.

I will return to Victoria later, but the comfort to the rest of the nation is that Victoria arguably has more potential to prosper in the current environment than any other state except WA. There are people of talent in the Victorian government that can take advantage of that potential, but they are not being listened to.

In recent years, my retail information group has been very accurate in relaying to the community (sometimes including the RBA) what is actually happening in the retail sector, particularly in the areas outside the 30 per cent of people who are mortgage or rent stressed. Accordingly, I am very confident about conveying this sudden switch.

The official figures will take some time to reflect what has happened in June. We may have to wait until August. Given Victoria’s high population, the average sales response in the official figures will be masked by the averages.

But the fact the rest of the nation is doing well will make it very difficult to reduce interest rates in 2024.

The hawks on the RBA board advocating for an interest rate rise will now shout louder. But one can only imagine what will happen in Victoria if it gets saddled with both higher interest rates (caused by the spending of other Australians) as well as its bad government.

Victorian Premier Jacinta Allan speaks to the media during a press conference. Picture: Diego Fedele/NewsWire

Across all of Australia, enterprises including governments are battling with higher costs which extend over wide areas. As I explained earlier this week, the impact of interest rates on inflation has been lower than expected because enterprises have cut back their supply and lowered their quality on the expectation of continued tough times.

And they also face the industrial relations legislations coming into force on August 26 which will reduce productivity and increase costs, although the impact may be delayed until after the Federal election.

There is little doubt that the rising spending has been triggered by the anticipation of tax cuts, increased access to superannuation by baby boomers and the spread of the wage rises to those on awards.

In addition, there is relentless government spending from both federal and state governments, usually based on borrowing. Together these actions represent a significant stimulation and its impact has arrived earlier than expected.

The message from companies is that most believe that while they will have to lift their supply capacity, it is still the right time to review their cost structures.

And, as always, not every enterprise benefits from the rise in spending.

My experience has been that when there is a sharp change in spending trends (either up or down) it does not suddenly go into reverse, so we are looking at an event that will extend well into 2024 unless hit hard by the RBA or a serious global reversal.

The rise in demand will cause all those under margin pressure to consider lifting their prices. At this stage, most are reluctant to do that and plan to continue concentrating on reducing costs.

My Victorian readers don’t need to be told why they are restraining their expenditure in the face of some of the worst government actions the nation has ever seen.

But for the benefit of those in other states, let me explain what is taking place in Victoria.

The government’s mess is highlighted by debt. Not only is it dangerously high, but the state plans to send it skywards by spending vast sums on a bizarre scheme to run an underground suburban train on a route that nobody needs (“the train to nowhere”).

Rampant government spending has trigged huge taxes particularly on property which have caused an avalanche of unsold dwellings particularly in resort areas.

The health system has fallen to pieces, there is a crime wave of youngsters on bail (one has chalked up 288 offences while on bail), the Commonwealth Games fiasco, spending $42m to conceal its gas reserves and protest rules that are different to other states which cripple Melbourne, and much more.

Additional money will not help Victoria until the government is fixed. And for Victorian readers I will give some cheer because with even moderately-adequate government the state can be turned around and in the current government there are people of talent who can do it.

The potential is huge. Victoria’s combination of renewables and low-cost, non-fracking, low net carbon on shore gas can provide cheap reliable energy not available in any other state.

With sensible government zoning the state can also provide some the cheapest housing, rents can be reduced if landlords are encouraged, the education system is good, although the University of Melbourne has management problems and there are wonderful sporting facilities, and much more.

Victorians understand the problem and the solutions, and they can join the rest of the nation in enjoying the upsurge if government politicians act in the interests of the state rather than their personal agendas.