As Blind Freddie would see things are a little bit pear-shaped for the economy, we have the politicians and political commentators talking about cost-of-living crisis on one hand and on the other we have the Reserve Bank board and in particular the Governor Michele Bull-at-a-Gate saying we’re spending too much and inflation is going up.
This is my third version of this blog, because every time I write it either something changes, or it just doesn’t come to the conclusion that that is correct, and I go away and think about it a little more and talk to a few more people and come to a completely different consensus. So here it is the third and final version of We are at a Crossroads!
Yes, we have cost of living pressures, these are not within our control, such as the price of electricity, insurance, rates (Council), fuel. Yes, we can cut back, we can turn lights off and we can have less air-conditioning and we can make cutbacks in insurances (but maybe you shouldn’t) but you are still going to pay your council rates, or they will eventually take your house! And the government is doing little bits here and there, the $300 pa electricity subsidy, the Stage 3 tax cuts (more on this a little later) all contribute to putting a little bit more money into the economy. But at the same time as anyone would have seen we continue to have people travelling overseas on holidays, we don’t have a great deal of unemployment, and some sectors of retail spending is still going okay. Now I am not bemoaning anyone having a holiday I have some clients and friends that have recently been away for six weeks, but they generally haven’t had a holiday in probably four or five years and have been saving for this for months(years). In some of these holidays would have been paid for six months ago generally you don’t just finish work on Friday and take off to Italy on Monday without having booked and paid from accommodation and airfares.
But I think this is what has our esteemed head of the Reserve Bank scratching her head.
In the last fortnight I’ve had a couple of pertinent conversations with people (although one was not as I expected).
Generally, anyone that follows my YouTube Channel may have seen the comment from my Ferrari loving client bemoaning how I got stuck into the baby boomers, which is probably a fair comment – see the link here:
The baby boomers are that generation of people that are still travelling overseas generally however my Ferrari loving client does make a good point with the recession that we had to have in the Keating era, they would work three jobs just scrape by and their kids would go without. Of course, interest rates famously got to 18%. We won’t get to it this time because we have too much debt in the economy however, I don’t feel we have many people taking second and third jobs just to make ends meet – yet.
Another one of my business clients has restructured their business, laid off some staff and is basically doing everything they can just to keep things afloat because they are finding spending is down.
One of my other clients in the hospitality industry has commented that people are buying one slice of carrot cake sharing that between two and even four people. That is penny-pinching to the nth degree!
But of course, there is one stray comment from someone who probably should know better and will be reading this blog that said economy is tight but it’s not over the edge. And they could well be right.
Of course, there is truth in all those statements because as we have found there is no one right answer.
This next bit is not going to be popular with my readers but the problem our Reserve Bank has on one hand is we have the government put in a little more cash into the economy (not a great deal) but our battle with inflation is not yet over. The rhetoric from the Reserve Bank’s interest rates could rise and frankly I think this is the crux of where we are at a crossroad, if they were serious about raising interest rates at the next board meeting at the beginning of August, they would raise rates not 0.25% but by 0.50% to actually give the public a shock. I don’t think they will, they will keep rates on hold and that is a crossroad because they can go on with all the rhetoric, the only way they are then going to see inflation is to sit on this high rate for a longer period if they do nothing else.
Now there is a method in my madness, put the rates up by 0.50% (maybe even 1.00%). Things will stop. Spending will stop. Inflation will fall. But for the government we will be in a recession, an actual formal recession not the technical recession we are in now.
And once that happens interest rates will need to fall really dramatically to prop up the economy again because people actually have stopped spending money, unemployment will have risen and confidence will be even lower than it is now so of course the Reserve Bank will need to boost the economy then.
Whilst I think this is what needs to happen, it won’t. I don’t think the Reserve Bank board have enough spine to do that to their masters the government as that will result in a change of government which of course our PM does not want!
Now back to my comment on the tax cuts. All of our employed staff will have now most likely see two pays with a tax cut in unless of course you are paid monthly as you will still have to wait a little longer. For goodness sake do not let these tax cuts become a lifestyle creep that is you just spend that little extra money you have on living. The temptation is there and it’s pretty easy to do. My solution is now you’ve had some extra dollars, sit down and work out how much that is to you and put that back into your mortgage or your savings for a rainy day. What I’ve seen across my desk is more people coming to me for refinance that would normally have $50,000 or $60,000 in the bank that have virtually nothing because they have continued to live their lifestyle and they’ve spent their savings. It is not universal, but a little more prevalent than what I’ve historically seen. What I am suggesting is to cut back to preserve for future rainy days.
If you want to discuss anything you find here further, please do not hesitate to reach out to me on my mobile 0421 689 999 or reply to this blog. And of course, if you’re struggling with meeting your commitments, please pick up the phone straight away – it is better to have a conversation with me then fall into bad position with your lender. We don’t have all the solutions, but we do have all the strategies.
