Glynn’s take: A small move up in rates has already toppled Australian consumers

Reserve Bank Governor Philip Lowe this week said he expected consumer inflation of around 7 per cent this year, a level only workers aged 50 and above will truly recall. Picture: Getty Images

Australian consumer confidence has had a wrecking ball go through it in the past few months, and the Reserve Bank of Australia has only just nudged interest rates a little above the record low. What gives?

A weekly survey by ANZ and pollster Roy Morgan published on Wednesday showed that consumers now feel as downbeat as they did during a recession in the early 1990s, when unemployment soared to double-digit levels and the official cash rate jumped to 17.5 per cent.

Then-treasurer Paul Keating lived to regret referring to the early 1990s downturn as the “recession we had to have”.

Mr Keating was referring to success in getting inflation to trend lower at the time, but that was lost on the legions of the newly unemployed and destitute former small business owners.

By comparison, the economy is now growing strongly, wages are rising, employers are clamouring for skilled workers, official interest rates stand at just 0.85 per cent and unemployment is at its lowest level in nearly 50 years – and expected to go lower.

Still, the confidence survey showed the number of respondents expecting “good times” over the next five years had fallen to a record low of 10 per cent.

At face value, the comparison between now and the start of the 1990s suggests the current crop of Australians might have to harden up a bit.

Still, there is a key common element between the economy of 2022 and that of 30 years ago. And worryingly, it is the inflation rate.

Reserve Bank Governor Philip Lowe this week said he expected consumer inflation of around 7 per cent this year, a level only workers aged 50 and above will truly recall.

What is concerning about the governor’s forecast offered up in a television interview might not fully capture what is coming.

The RBA has been slow to grasp the extent of the inflation impulse and has been scrambling to raise its forecasts since late last year, when it predicted consumer prices would rise just 2.25 per cent this year.

It is still two months before the RBA has to publish a fresh set of official forecasts, so trying to pinpoint something around 7 per cent now is open to massive reinterpretation.

That figure is really just a preliminary shot in the dark by the central bank. It was just over a month ago that the RBA had a confident forecast of 6 per cent inflation this year. Don’t be surprised if we see something even higher in August from the RBA.

Things are moving quickly and substantial wage increases are being struck as workers fear they will face real pay cuts, while employers are desperate to retain staff. Job vacancies are at an all-time high, and the urge to find a newer, higher-paying employer has a record number of workers on the move.

The RBA will raise interest rates further even as consumer confidence plumbs recessionary lows. It is shaping to tighten swiftly over the coming months, as there is an urgent need to get on top of accelerating inflation before it does long-term damage.

Australia might be a victim of its own success in some ways. Inflation targeting introduced by the RBA 30 years ago has proved highly successful. While there have been bumps and scrapes along the way, the economy has grown consistently (pandemic period excluded) through that period thanks in part to the backdrop of relative price stability.

The result of that win for the economy is that there is a generation or more of Australian workers who won’t fully comprehend what high inflation means. Price instability erodes confidence in the economic outlook, makes investment decisions harder and eats into the value of savings while pushing down real wages. The environment usually requires higher interest rates to cool demand, and government budget spending cuts.

Younger Australians might recall the warnings of their parents’ generation that inflation means interest rates approaching 18 per cent, and a river of business and mortgage failures.

While there is mortgage pain ahead for many, especially new entrants to the housing markets who are servicing big loans on average incomes, interest rates won’t peak at anything remotely like what was experienced in the 1990s. For starters, they are coming off zero, and higher household debt burdens today mean the crunch point for interest rates will be far lower.

For the million or so households that have never even seen an interest rise, there is comfort in the fact that underlying all this is a strong economy, low unemployment, high commodity prices, high savings rates and mortgage buffers that have most people years ahead in their payments.

If a recession is coming, and it might well be, it is better to enter that period of uncertainty from the current position of economic strength.

The Wall Street Journal