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John Hewson: Economic Briefing
Dr Hewson has worked as an economist for the Australian Treasury, the Reserve Bank, the IMF and the UN, a University Professor at three Universities, currently
in the Crawford School at the ANU, and as an Advisor to two successive Treasurers and the Prime Minister. Dr Hewson’s political career spanned eight
years as the member for Wentworth in the Federal Parliament. He was Shadow Finance Minister, Shadow Treasurer and Shadow Minister for Industry and
Commerce, and Leader of the Liberal Party and the Coalition in opposition for four years. Dr Hewson was a founding Executive Director of Macquarie
Bank, Chairman, ABN Amro Australia and as an active Chairman/ Director of a host of public and private companies (including GSA), Chairs two major
Charities, and serves on the board of a number of other not-for-profit organisations, including KidsXpress. He also writes regularly in newspapers
and is a regular commentator on TV and radio.
We have shared a few key takeaways from John’s economic briefing held in our boardroom.
Australia Consumer Confidence
The Australia Consumer Confidence index declined by 3%month-over-month to 100.5 in September 2018. It was the weakest reading since November last year, amid increases in mortgage interest rates, political instability, increased household debt and increased cost of living pressures.
Department stores are suffering and retail spending is flat. Wages have been flat lining around the inflation rate.
As we mark a decade since the global financial crisis, Australian households appear to be slipping back into a pre-GFC habit: saving less and increasing their debt. The household savings ratio slipped to just 1% in the latest quarter, its lowest since late 2007.
Australia's household debt is now one of the highest in the world. There is concern around the running down of savings and running up of debt, which seriously constrains monetary policy.
A large percentage of the big four bank’s mortgage books are subprime so there is a not a lot of leeway to put interest rates up without significant fall out. Banks are however facing pressure to increase rates up as their cost of funds goes up.
There is real concern in the household sector that the recent small increase in the variable mortgage rate will be carried through further. The direct effect will further impact the household cost of living. The wealth effect will see reduced spending as people’s homes are no longer worth what they originally were.
The RBA faces a dilemma - if it raises rates, it risks accelerating a housing crisis, if it lowers rates, it risks encouraging consumers to take on additional debt.
The debt problem is very significant.
The emerging world has $35 trillion of debt, their debt burden continues to grow. Some emerging countries are at point of breaking. You can see this with countries with significant short-term debt burdens, such as Turkey.
We are in a world which is unchartered.
The Royal Commission
The culture of banking is built around the profit motive. The banking sector will go through a rough period following The Royal Commission.
Financial conglomerates are a mix of different cultures. It is likely that there will be political pressure for the financial conglomerates to breakup. We are already starting to see some institutions move to breakup and sell various departments.
The Play of Politics
John was surprised by the number of approaches he had from foreign media - from the United States, Europe and Asia - as the recent leadership “madness”
unfolded in Canberra. All media enquiries began with the simple questions: “Actually, what did Malcolm do that was wrong?'' “Why was he replaced?''.
There was no real answer and Morrison has decided to just leave such reasonable questions unanswered.
Future of Politics
Government is dominated by short term politics, and it is getting worse. There is frustration as voters want to see honesty, authenticity and genuine attempts to solve problems, not just have them kicked down the road.
The LMP will find it difficult to retain government given the recent collapse in the primary vote. It will be very hard to build that vote back up. It is hard to predict how it will unfold. Politics is a contest at the moment.
Private equity firms have accumulated a $9.2bn cash pile. The number of well-priced desirable investment opportunities are minimal.
At the moment, the United States is looking good following the sugar hit from the tax cuts, defence and infrastructure spending.
Trump is in hot water on many fronts. He is using other issues as a distraction.
The United States has a big financing task, which is impacting on the bond market along with the Fed’s increases in official rates. There are bubbles in the currency markets, stock markets and housing markets.
When the correction comes, there is concern how big will it be. It could be triggered by the debt issue, Trump or the collapse of emerging economies. There is also heightened concern around current geopolitical tensions.
There is high uncertainty around the capacity of Governments to recover from a global recession, as policy capacity is most limited.
We are in uncharted waters with lots of big challenges. In the 2020s our budget pressures are going to be very real with the commitments that have been made in funding schools, hospitals, the NDIS, defence and infrastructure.
Politics today is a short-term game – populous, opportunistic and mostly negative. The development and implementation of good evidence based policy is becoming almost impossible.