Glenn Stevens and his Reserve Bank board are about to make a very dangerous decision. If they raise interest rates either next week or in a month and follow it with another later in the year they will send the non-mining sector of the Australian economy into a deep spiral.
I fully realise that all the Reserve Bank board advisors, Treasury and respected economists, including some who write for Business Spectator, are urging the Reserve Bank to lift rates – and if Stevens does not respond to their demands he will cop a blast.
But very few of the interest hike gurus go out into the real world and discover what is actually happening. That’s my job. Yesterday we had retail figures that on paper looked very encouraging. But Stevens and his board should go and talk to discretionary retailers. If they do, they will find that the retailers gained those sales by heavy discounting. Many were so desperate that they were quitting stock at almost any price.
Stevens should take the Reserve Bank board to our international tourist operators in Queensland. They are bleeding as they have never done before. If the Reserve Bank board talks to manufacturers they will see fear in their eyes. Efficient tourist operators and manufacturers are being seriously affected by the high dollar, which will go even higher if rates are increased.
But what would really open the eyes of Reserve Bank directors would be a discussion with the people in the big banks, who are actually handling a skyrocketing numbers of problem loans.
Yesterday I spent time with Mark Bouris, whose new company YellowBrickRoad lists today. Bouris and I go back a long way and during that time I have found he understands the Australian mortgage industry like few others.
Mark gave me a table which puts into numbers what I have been feeling by talking to people. The Bouris table illustrates the plight of a family that is earning $150,000 a year – in other words, they are on the government’s “rich list”.
A vast number of these ‘rich’ people, according to Bouris, have borrowed $750,000. Bouris then plots their fortunes since August 2009 and calculates what two interest rate rises, a flood levy and a likely carbon tax will mean to their finances.
My research assistant Alex Liddington-Cox has graphed the Bouris scenario and you can see very clearly that this family will not meet essential expenditure under the Bouris scenario. In other words, our ‘rich’ family not only has no money for discretionary spending but worse still they are going to have to cut back on essential items like food.
The impact that is going to have on retailing, house prices, unemployment and the way people will vote does not bear thinking about. We will see a recession in non-mining Australia of some magnitude.
Let’s just take one area. Retailers, who are among Australia’s biggest employers, are receiving a double blow because the internet is beginning to hit business. We will see many of our strip shopping centres with empty shops.
In former years the Reserve Bank board was crafted in a way that enabled it to get a wider view. The 2011 board members are talented people but only one or two are in touch with my world.
Reserve Bank board members should be commissioned to go out into my world and discover what is really happening before they make an interest rate decision. However, I have little doubt that the board room in Martin Place, Sydney is just too cosy and the Reserve Bank board will do what their “advisors” tell them to do and raise interest rates this month or next.
The rest of Australia outside the miners must fasten their safety belts.
This article first appeared on Business Spectator.
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