Our governments must wake up to powder kegs they have created

The massive spending power of Australians not under mortgage or rent stress has stunned retailers during the Black Friday sales period, with many recording incredible sales increases of around 13 per cent.

In September many people did not believe me when I alerted readers to a significant change in the spending mindset among the 70 per cent of the population not in financial stress.

That mindset switch has exploded beyond my expectations, although the Christmas/Boxing Day spending is unlikely to maintain the Black Friday rate of increase.

But the latest spending boost means interest rate pain must continue for most of 2024 and perhaps longer, unless federal and state governments wake up to the powder kegs they are creating. But a severe downturn is not likely.

Meanwhile in the US, Federal Reserve Chairman Jerome Powell is adamant he has no plans to reduce interest rates and may in fact increase them.

But, despite recent nervousness, the US bond markets this week bet on the most powerful central banker in the world being completely wrong and that US rates will fall. Gold and bitcoin skyrocketed. It’s a big market call.

US Federal Reserve Board chairman Jerome Powell has said he has no plans to reduce interest rates any time soon. Picture: Saul Loeb/AFP

Irrespective of what may happen to US interest rates, Australia’s underlining powder kegs will make it very difficult for the Reserve Bank to significantly reduce inflation and interest rates in 2024 and there is a clear danger rates may rise further.

What is taking place within our country is different to most other nations because we have created these dangerous powder kegs:

Powder keg 1: Governments are embarking on crazy infrastructure spending, where various arms of governments are pursuing projects which ignore what other arms are doing, therefore accelerating the construction costs of labour and raw material led by steel and concrete.

The cost increases for exploding renewable projects will be monumental and create high Australian power costs for a generation.

In non-energy infrastructure the worst rises look set for Queensland, where the estimates for the Olympic Games infrastructure costs are becoming far too low given the explosion in Queensland costs.

The Queensland Palaszczuk government-led Olympic Games has recently come under costing fire. Picture: Peter Wallis

Victoria is not far behind, but its problem can be eased by pigeonholing the $125bn (real cost $300bn) South West rail link and the $12bn (real cost $25bn) airport rail link.

The biggest infrastructure need in all states is housing and unless the pet projects of the various politicians are cut back the cost of this housing will also explode.

However, most states can actually contain the cost of housing, but it requires the Commonwealth government to substantially cut back on grants to states unless they streamline their approval and permit processes to slash costs.

NSW is the worst so has the greatest potential. The cities that are best placed to overcome housing shortages have cheap inner-city land that is often on top of rail lines. Melbourne has huge quantities.

Powder keg 2: The most severe pain is not actually taking place in the mortgage area because banks are not exercising their mortgage security and evicting people when they fall behind in payments.

In most cases, if people make a fist of tailored regular payments, they will retain residency of their home.

Accordingly, while mortgage-stressed people’s spending is being squeezed hard they are surviving by cutting back and embracing casual jobs.

But there is no such payment protection in rental areas where appalling living conditions are sometimes required because of high rents.

To encourage investment in this area the states need to make their rental laws fair to landlords. But if the building approval process is made smooth and costs and skills shortages are not inflated by “infrastructure sprees“ the capital is available. If state governments don’t wake up to the disaster they are creating, the community revolt by the renters may get violent as they watch the ‘70 per cent’ go on a spending spree.

Powder keg 3: After almost two years of wage restraint, where the real income of Australians fell sharply, large parts of the nation are saying “enough is enough”. The wage rise pressures are now starting at around 4 per cent but often revolve around 5 per cent. If inflation keeps up those pressures will intensify and increase.

Even without wage pressure increases the cost of businesses, including skyrocketing power costs, a wide variety of other goods and services will rise sharply unless our high interest rates boost the dollar.

Businesses which cannot pass on these costs will suffer and will need to retrench staff which is exactly what the Reserve Bank is trying to achieve with its higher interest rates, but is being thwarted by the powder kegs, labour shortages and other factors.

If prices respond to the next round of wage, power and other cost rises then interest rates will certainly rise further.

Powder keg 4: The industrial relations bill has been prepared as a union agenda for a world that has dramatically changed. In overall terms productivity will fall and inflation will rise but in specific terms it will make it almost impossible for employers to hire casual workers, adding extreme pressure to mortgage and rent stress. Contracting services will be high risk.

The Albanese government’s sweeping new IR laws will make it almost impossible for employers to hire casual workers. Picture: Richard Dobson

Powder keg 5: In seven months’ time, the tax cuts legislated by the Morrison government will come into effect. They will greatly stimulate the economy. The biggest beneficiaries will be the 70 per cent of people not under rent and mortgage stress.

Finally, if the US bond market is right and American rates are about to fall and our rates are maintained or increased then the Australian dollar will rise further. This will certainly offset some of the power in the above powder kegs, but they are still issues which need to be tackled.