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September 7th, 2014
Economists are often heard talking about the high Australian dollar, a declining mining sector and a supposed housing bubble.
The government has talked about a ‘budget crisis’ and the mining boom, we are told, is over.
But are things really that bad? Should we be hiding under the bed?
As it turns out, no. While the Australian economy has some hurdles to jump, and consumers worry about an unpopular Federal Budget, the real question is, how are the challenges affecting you? Experts say that the slow economy will reduce your likelihood of getting a pay rise as well as making it harder for some people to get credit from a bank.
Some important parts of the job market, like manufacturing and mining, are really hurting, while other sectors are stable. But there are some upsides, too.
If you feel a reluctance to open your wallet, or you have a niggling worry that’s stopping you from splashing out on a new couch, clothing or holiday, don’t worry, you’re not alone.
Economists call that ‘sentiment’, and for a while now the people who make the economy tick – that’s you and me – have been watching what they spend.
Professor Jakob Madsen, economics researcher at Monash University, explained that with Australians concerned about future finances, they are not spending – a clear indication of low consumer confidence.
This was particularly the case in the months following the Federal Budget. “Consumer confidence, that’s something you can’t do much about.
If people are negative about the prospect of the economy, they don’t spend much,” he says. ME Bank general manager markets John Caelli says gradually rising unemployment and stagnating wages are part of the hit to Aussies’ confidence.
“The impact on households of a slower economy is seen in the level of unemployment, which remains above 6 per cent,” Mr Caelli says. “As a result households are continuing to focus on paying back debt rather than spending to stimulate broader economic activity.”
While an unemployment rate above 6 per cent is not a good thing, paying down debt generally is. It means that if bad times hit, we are better prepared.
While unemployment might be edging higher and confidence slipping, interest rates are one of the economic bright spots for consumers and for borrowers. It means they have more money in their pocket. Most Australians pay attention to interest rates because it affects their mortgage or savings accounts.
While people mortgages like low rates, savers don’t – it means their deposits earn less interest. But interest rates have a wider significance.
Rates have been kept at a record low of 2.5 per cent since August 2013 in order to stimulate the economy. Yet despite a booming property sector, low rates have not boosted consumer confidence, while the Australian dollar has remained high.
Mr Caelli says low interest rates are helping the economy, but more investment is needed in business. “Lower interest rates are helping the economy but the key remains a pick-up in business investment to offset the falls in mining investment.”
The Reserve Bank is expected by a majority of economists to start raising interest rates again next year.
This week the Australian dollar slipped below 89 US cents – a seven month low. The reasons for movement in the dollar are complex, but the latest fall comes on the back of worries about China’s future growth.
For online shoppers, travellers and importers, a high dollar is a sign of good times. However, its fall is good news for everyone else and was welcomed by the Reserve Bank of Australia which has been trying to push down the dollar through low interest rates.
A lower dollar means more revenue for local miners and other exporters such as tourism, and also improves the prospects for businesses in other parts of the economy.
The mining sector is beginning to struggle with decreasing demand. If that elicits a “so what?” response, Professor Madsen warns the economy is too reliant on mining.
“When a high productivity sector goes down, it takes the whole economy down,” Professor Madsen says As countries like China buy less coal and iron ore from Australian mines, massive job losses are expected in the mining sector.
This will obviously hurt mining families and investors, but Professor Madsen says that ordinary Australians won’t be directly affected.
However, it will hit governments’ bottom lines, with less revenue coming in to state and federal coffers. “People are not getting poorer, it’s only an issue for people like Clive Palmer,” Professor Madsen says.
While the economy could be better, it could also be much, much worse. Remember, Australia hasn’t had a recession for 23 years. Depending on which way the winds of economic fortune blow, we may look back at this period of relative stability with fondness.
Ebony Bowden writes for The New Daily. Click here to visit the New Daily website.
This publication was issued by First Super Pty Ltd (ABN 42 053 498 472, AFSL 223988), as trustee of the First Super superannuation fund (ABN 56 286 625 181). The information is not investment advice and does not take your personal circumstances into consideration. You should consult the product disclosure statement (PDS) before making any decision. Content was accurate at the date of issue, but may subsequently change. You should contact First Super on 1300 360 988 for updated information and to obtain a copy of the PDS.
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