Maxim Economic Insights - December 2018


• In aggregate the Australian economy is doing relatively well with 2.8% growth. But there are risks around consumers and households which threatens the outlook into 2019.
• House prices are first and foremost the risk with the price falls accelerating.
• Being positive has been the right approach these past 5 years. But it’s likely an elevated level of caution is warranted in the period ahead for business owners and managers.



The RBA did something remarkable earlier this year.

In the minutes of the May Board meeting Australia’s Central Bank said (my bolding):

"Members agreed that it was more likely that the next move in the cash rate would be up, rather than down. As progress in lowering unemployment and having inflation return to the midpoint of the target range was expected to be gradual, members also agreed that there was not a strong case for a near-term adjustment in monetary policy. Rather, members assessed that while this progress was unfolding, it would be appropriate to hold the cash rate steady and for the Reserve Bank to be a source of stability and confidence".

At the time, as a behavioural economics and finance guy, I thought it to be a massive own goal on the RBA’s behalf. It signalled neither stability or confidence but rather a worry about uncertainty. It signalled the RBA knew tough times were coming and it was going to try to talk things up.

That the RBA knew we’d all pour over it, made the assertion at the very end of May’s minutes, all the more remarkable.

Fast forward seven months to the minutes of the December meeting and the RBA is still hanging onto hope as its primary policy tool. It continues to signal that the next move in rates will be up but is now being more explicit in its thoughts on the outlook for consumers and consumption.

The minutes this month said (my bolding):

"The outlook for household consumption continued to be a source of uncertainty because growth in household income remained low, debt levels were high and housing prices had declined. Members noted that this combination of factors posed downside risks. Notwithstanding this, the central scenario remained for steady growth in consumption, supported by continued strength in labour market conditions and a gradual pick-up in wages growth". 

What is most remarkable about this is that when you tie it back to a recent speech from deputy governor, Guy Debelle, you get a real sense that the RBA might be assessing the situation in far too Panglossian a way.

That is, like the US Federal Reserve and the global economics fraternity before the GFC, they may simply be underestimating the impact of housing’s downturn on the economy.

Debelle said of that time in US economic history which lead to the GFC (my bolding once more):

"Macroeconomists generally looked at what was unfolding in the US housing market and expected that its spillover to the rest of the economy would be contained. The slowdown would be mild and, to an extent, welcome in containing the inflationary pressures that had been building".

Debelle also introduced the notion the RBA could cut rates and use unconventional monetary policy measures – such as quantitative easing – if conditions warranted in Australia.

Again, the RBA are no dummies. They know a raft of domestic and international economists, money managers, and journalists will read and parse their words for meaning.

The message they are trying to get out is things will be okay, but if they are not, they will move to adjust policy in a pragmatic way to stabilise the economy.

As they always have.



The problem with the positive spin the RBA is putting on things is that it belies the real pressure households are now under, “because growth in household income remained low, debt levels were high and housing prices had declined”.

This is the perfect storm for households and thus domestic consumer consumption.


Indeed, we may only be halfway there in terms of the fall in house prices according to Shane Oliver, AMP’s chief economist who said recently:

“The decline in Sydney and Melbourne property prices likely has much further to go as these considerations continue to impact particularly as Comprehensive Credit Reporting kicks in making it even harder to get multiple mortgages and if changes to negative gearing and capital gains tax become reality after a change of government at the coming Federal election…In these cities we expect to see a top to bottom fall in prices of around 20% spread out to 2020”.

He noted that the risks are still to the downside and I agree with him.

Now Sydney and Melbourne are not Australia, but they are the two biggest cities and will have an impact on regions surrounding them, as well as on the economy as a whole.

But, behaviourally the constant press coverage, water cooler conversations they encourage, and lack of wages growth means the transmission mechanism may not be linear to the regions, but sentiment and economic activity will be impacted.


Retail trade and motor vehicles are two obvious areas of pressure and risk in the economy going forward, and indeed we’ve seen more retailers going broke than ever before recently.

Again, different parts of the country will perform differently. But the overall atmosphere is one of disquiet because the reality is that outlook has darkened for the Australian economy as house prices have come down and impacted Australian households spending via the wealth effect.

Is not the collapse of motor vehicle sales evidence of that?

Indeed, my colleague David Scutt from Business Insider wrote of the ME research about the impact of the outlook for housing on people, he wrote:

"A new survey of 1,500 Australians from ME Bank suggests the risks of a housing-led spending slowdown are building, especially for those who bought at the top of the price cycle".

"The key finding is that those who bought property in the past three years are significantly more worried about the impact of prices falling,” says Andrew Bartolo, ME’s Head of Home Loans.

In a sign that ongoing price falls may hit consumer spending, 49% of respondents said falling prices made them feel less wealthy, while 73% said they would be more careful with their money in the future".

For the moment, overall business conditions remain strong even if confidence has slipped, and employment – crucially unemployment – remain at a level that should see households not have to worry about job losses.

That is the one truly bright spot in the domestic economic landscape as the RBA has highlighted recently, but a slowdown in spending, if house prices continue to fall, could threaten this still robust employment outlook.

That is the real fear with many pundits, suggesting the housing market is only half way through to the ultimate nadir in prices there is every chance the deceleration in spending and economic growth worsens.



The trouble is that the RBA’s forecasts for growth look heroic after the big dip in consumption and headline growth in the 3rd quarter. Likewise, even though the Federal Treasury reported a much healthier outlook for the government’s budget balances, Treasury’s outlook for the economy was somewhat less optimistic than that of the RBA.

Indeed, even a cursory perusal of the recent versus prospective GDP forecasts for the RBA and the Treasury, suggest some room for the RBA to change its rhetoric.

The notion of a convergence toward 3% seems heroic given current disquiet of the global and Australian economies.


Chinese and European growth has recently deteriorated and the US – which is currently running hotter than usual thanks to fiscal stimulus – is slowing back to levels viewed as more sustainable long term.

That, the trade war, and worries about Asian growth, more broadly suggest the backdrop is changing of the Australian economy more broadly. The sectors which are balancing out consumption could pullback a little.

Being cautiously optimistic has been the right approach through thick and thin in the Australian economy for the past 5 years, but this may be a different period given the fall in housing is being driven by regulatory actions, and thus availability of credit. That suggests, without massive fiscal stimulus, which we may get in the run up to the 2019 Federal election, or a material walk back in lending regulations from APRA, which seems remote, there is no obvious circuit breaker to price falls at present.

So, it’s a time for caution, communication of value, focus on price points, and slicing the offering for the particular target markets to ensure the highest chance of success in sales and revenue generation.



The RBA may be wrong about the outlook for growth in the Australian economy. Crucially for this note and its readership, the RBA may have critically underestimated the impact of the fall in housing and prices on domestic consumption.

That’s the clear takeaway traders, investors, and an increasing swag of Australian economists have arrived at given the continued fall of house prices in the two biggest cities especially. Equally with Construction coming under intense pressure and wages growth still subdued it is no wonder that with a low savings rate, domestic consumption was weaker than expected in the recent Q3 GDP print.

The RBA is still putting a brave face on things, and their outlook is still for solid growth for the next three years, but there may be signs that their outlook is indeed too Panglossian.

From your writer’s point of view, it has been my experience that being glass half full and underreacting has been the best approach over the 5 years I have been doing these notes. But that too may be in need of change.


Written by Maxim 'Economic Expert', Greg McKenna

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