BOQ chief economist says generous government spending and migration are why
While conditions are improving for households and businesses, there’s no denying that Australia continues to feel the pain.
By Bank of Queensland chief economist Peter Munckton’s estimates, household real disposable income fell to at least a 60-year low in 2024. Since that is when records began, Munckton’s believes 80-year lows could be more accurate.
Improving conditions from 80-year lows hardly fills one with confidence.
True, inflation is on the way down, but that only means prices will keep rising at a slower clip. And without real wage growth keeping pace, the average Australian will continue to have a pessimistic view of the economic forecast, as long as those flat whites keep going up in price.
“This whole cost-of-living thing is becoming slowly less of an issue… but it’s still going to be an issue for a little while, because wages haven’t fully adjusted to the higher prices,” Munckton (pictured above) said in this week’s ME Bank Economic Update.
And given the public’s pessimistic view of the economy, any incremental cash savings are more likely to be put into an offset account rather than back into the economy (for now at least).
Which brings us to businesses.
“If you go out to our friends in the retail sector, they’ll tell you that they’re seeing some better signs out there, but not massively so,” said Munckton.
Businesses were feeling “very confident” no more than two years ago. They found it easier to pass inflation through to consumers without copping flack because consumers acknowledged that inflation was a major issue.
Somewhat ironically, cost inflation is now lower, but business margins are also decreasing as their ability to pass costs onto the customer has been curtailed. That means businesses are pulling back their capital expenditure budgets.
It paints a picture of an economy under stress, which raises the question: Why isn’t the economy in recession?
Or as Munckton put it: “Why is the economy still growing given that big parts of the private sector are actually being hit very hard?”
Thank the government and migrants
Government spending as a percentage of the economy is currently at its highest point since the Whitlam era in the 70s, according to data shared by BOQ. The data shows that close to 80% of jobs created in the last year were in government-related sectors.
“The government has been a massive factor about why the economy's going forwards, not backwards,” Munckton said.
The other big recession-busting factor? Migration. Well, population growth in general. “There’s just more of us,” said Munckton.
While population growth in percentage terms is slowing in Australia, just as it is across the Western world, Australia’s population, in terms of raw numbers, grew the most it ever has in the country’s history last year.
“Even though any one of us has been hurting big time… the fact that there’s so many more of us means that we just have to sell more shoes… more bananas,” Munckton said about keeping the economy out of a recession. “The fact is, more people and the fact that the government is doing a lot of spending has meant the economy is going forward.”
The bottom line seems to be: Government spending and more people have fended off a recession – but does that really matter if the individual person is fundamentally no better off?
MPA posed the question to Munckton following the webinar. He did indeed explain that Australians have been suffering a per-capita recession despite the economy as a whole staying above water.
However, the fact that the economy is still going forward should not be taken for granted.
“Is it better to have a per-capita recession with the economy going forward than a complete recession? The answer is yes,” said Munckton.
Thanks to economic growth, the government has been able to operate in a surplus. This means it has been able to spend money, which means tax cuts have been possible and public sector jobs have been created.
Per-capita incomes are slowly but surely going forward and the ship has turned – now it’s a matter of battling through the dregs of the storm and hopefully emerging unscathed.
What about house prices?
If and when incomes and confidence gather pace and rates come down, the natural conclusion is that the demand-supply imbalance will only skew further to demand.
So while the Labor government has a number of pro-build policies on the go, it is inevitable that house prices will keep going up. It’s just a matter of how much.
“We’re starting from a point where house prices aren’t exactly rock bottom,” said Munckton. The upside is that there may be limited room for them to move much further.
Historically speaking, house prices have increased by between 10-15% in the two years following a cut-reduction cycle, according to Munckton. There have been instances where this has been far higher and far lower, but this has typically been because of extraneous circumstances that aren’t in play at this point in time.
Looking good for brokers
Munckton expects the average mortgage broker to do reasonably well amid this macroeconomic soup.
Not only will demand for home loans be higher, but the cost of running a brokerage is going to come down in line with cost disinflation.
He expects competition to remain red hot though. “On the demand, I suspect that (brokers) will do reasonably for the factors that we’ve gone through. The economy is going to be better, incomes are going to be a little bit higher, rates are coming down. All of that means there should be better demand out there.”
Yet brokers must also appreciate that it is a very competitive market. “That fact is not going to change for a while yet,” said Munckton.
