Ross Greenwood speaks to Westpac chief economist Bill Evans as consumer confidence has dropped to the lowest level in four years amid growing concerns about the state of the Australian economy.
Ross Greenwood: Great to have your company here on Money News going right around Australia. I mentioned to you earlier about just that view on interest rates and where maybe they should go because whatever is being tried right now by authorities, the government and the Reserve Bank just doesn’t seem to be working. Part of the reason you can sense this is because despite having had an interest rate cut in June, and an interest rate cut in July, then one only this time last week or a week ago, plus also having had significant tax cuts handed out to most of the middle-income earners in Australia, it’s not showing up in the retail sales and today, you saw consumer confidence drop to four year lows.
Notwithstanding these, it would seem as though the Reserve Bank is on a headlong, if you like, spree right now to get interest rates to zero and then you heard from the Reserve Bank governor yesterday as part of his role with the Bank for International Settlements, in other words, the global central banks that they’re already investigating and have looked at what happens if you start to go to negative interest rates, or you get a quantitative easing or unconventional monetary policy measures.
It seems as though there’s a group think here but they shouldn’t be heading down there but what they’re trying right now for the moment, isn’t working. Then you sit there and go, “Well, okay, if they said we’re going down that path of quantitative easing, or unconventional monetary policy, you have people such as Stephen Granville, who is the former deputy governor of the Reserve Bank, so he’s no Mike. He’s been there. He says, “Don’t press that button, please. Whatever you do, do not do that.” We spoke with Rob Cornell, the chief economist of ING based in Singapore yesterday. Here’s what he said.
Rob Cornell: I think that the problem is, if you look around the world at the central banks that are still using these policies, The ECB would be a good one, the Bank of Japan would be another. The very clear lesson you get from this is it simply doesn’t work and in fact, I think there’s even an argument that as you start pushing interest lower and lower– and I’ve got a gut feeling that once they drop below about ones, it can even start to have negative consequences.
Ross Greenwood: I’ll be really interested to find out the views of a man who I respect in this area, and also has been highly accurate in deciding where interest rates will go. That is Bill Evans who was a chief economist of Westpac he’s on the line right now. Bill, many thanks for your time.
Interview with: Bill Evans, Chief Economist, Westpac
Bill Evans: Good afternoon, Ross.
Ross Greenwood: The Westpac Melbourne Institute of Consumer Confidence Index is out today. It’s fallen to a four year low and yet the consumers have had tax cuts, the consumers have had interest rate cuts. Every piece of evidence right now would suggest it’s not working.
Bill Evans: You’re right. We saw a 5.5% fall in confidence today. I think there are a lot of other factors that are impacting confidence at the moment. I think people are finally starting to accept the fact their wages are going to remain sluggish for some time, there are clearly concerns about the global trade environment. You talk about the weakest level for four years.
Four years ago, the main factor behind the plunge in confidence was a 30% fall in the Chinese share markets so foreign factors are important. I think the debate about whether there should be more fiscal policy support is unnerving consumers and I guess we have to say that the Notfall pass-through from the banks would have also been a factor in terms of undermining their confidence but you’re right. I think also the whole idea of interest rates below 1%, what’s wrong with our economy? Why do the rates need to be that low? That’s a factor there as well.
Ross Greenwood: Yes, all right. There is a big issue, whether the Reserve Bank wouldn’t have done this deliberately but has inadvertently spooked Australia’s consumers. Our household’s think that by pulling interest rates so low– because many people believe that that is commensurate with some sort of economic emergency, some sort of economic disaster, which clearly, if you look around the place, people are still getting up, they’re going to work, they’re going to the shops, they’re still doing all of that, sending their kids to school doing all the things they would normally do. Businesses are still out there running, struggling, trying to pay their electricity bills so all of this is still going on. It doesn’t, to me at least, seem like there’s any form of economic emergency taking place in Australia right now.
Bill Evans: No, there’s certainly no emergency and the idea of a recession in Australia, even if we were to get a couple of quarters of negative growth, that’s not really the sort of recession that we’re used to. We’ve had three recessions in 91, 83 and 74 in recent times, and in those, those first two, the unemployment rate rose from 6% to 11%. Even if we were to get a couple of negative quarters, we’re not going to get that sort of economic response so that’s not something that I think is a major factor.
Reserve Bank still believes that lower interest rates provide cash into the economy. People who get lower interest rates tend to spend more than those that have to face lower incomes from deposits and of course, there’s always the currency effect. When you look at that BIS report that you referred to, there’s always that aspect around, improving the transmission is important, but there’s always that aspect about making the currency more competitive. The Reserve Bank would certainly believe that that’s been a factor. The Aussie is down at 67.50 if there hadn’t been those three rate cuts, I would expect the Aussie would be near 70 cents.
Ross Greenwood: All right, so let’s say if the Aussie was at 75, even if it was at 80 cents let’s say, would that be such a bad thing Bill? It would mean that the price of cars would be cheaper, it would mean the price of clothing would be cheaper. It would mean the price of petrol would be less than what it is today, it would mean a whole lot of imported goods. Given the fact that private consumption accounts for 60% of Australia’s GDP give or take, would it not be a thing that a higher dollar could actually help attract some spending, which right now, lower interest rates and even tax cuts have not been able to do?
Bill Evans: Well, Ross, if those price cuts stimulated even more spending, possibly but the Reserve Bank would look at it and go, “Price cuts, that’s the last thing we need. We’re trying to push up inflation.” It’s always that issue that central banks talk about, is deflation, the fear of going the way of Japan, the fear of lowering inflationary expectations. That’s the one that’s at the core. We heard Chairman Powell talk about that this morning. That’s the core of their objective so the Reserve Bank would see lower interest rates as weakening a currency that helps inflation and it makes our exports more competitive.
Ross Greenwood: The problem is, Bill, it isn’t working, whatever it is, it’s not working right now. That’s why I’m suggesting think outside the square because my sense is, these global central banks, the Bank for International Settlements, for example, there’s a touch of group think about this. There’s nothing outside the square apart from we’ve got to get our interest rates down to zero. The real fundamental problem that I would have is if you got interest rates down at zero, it takes you years, potentially decades to try and raise them in the future, because of the terrible damage you would do to your economy and your consumers, if ever those rates were to rise.
Bill Evans: You mentioned our interest rate forecast and I’m certainly not forecasting zero. I think that we’ll get one more cut set to half a percent early next year and then we’ll have to rely upon these other policies, but certainly more stimulus from fiscal policy. I think as we go through next year, and the government becomes entirely confident that they can deliver on their election promise of a budget surplus in 19/20, they’ll see the need for fiscal stimulus, and that’s clearly what we’re crying out for now.
Ross Greenwood: That’s going to be tax cuts or some other sort of cash handouts that will be around the place at that time. They’d also be concerned about handing out tax cuts though, Bill, because if they hand out tax cuts they’re then molded into the economy, they don’t go away, and that’s the problem of giving out significant tax cuts, they stay forever.
Bill Evans: Yes, but there are other things that they can be doing particularly around infrastructure, around improving existing infrastructure through spending on maintenance and repairs. Certainly, I think the spending side if correctly targeted to boost the productivity of the economy is certainly something that I imagine they’re already looking at as something that we should be encouraging.
Ross Greenwood: I’ll tell you what, always good to have in the program, the chief economist at Westpac and one of the foremost interest rate forecasters in this country. Bill Evans, many thanks for your time.
Bill Evans: Thanks a lot, Ross.
Image source: 2GB