Posted: November 02, 2006

Fiscal drag is dragging!

The credit-fuelled household spending spree that has helped the Australian economy continue to achieve economic growth in the face of the massive fiscal drag (negative contribution) from the Federal Budget surpluses is starting to slow. The latest ABS data for September released today shows that retail trade increased by just 0.1 per cent. The August figure has been revised downward to 0.2 per cent. The markets apparently were not expecting this (having factored in 0.5).

What does it mean? Well with households straining under record levels of indebtedness and their major asset now dropping in price in most areas; with the Sydney labour market (where debt levels are highest) is contracting and unemployment rising; with the drought impacting severely on GDP growth; with two interest rate rises and more to come; with petrol and food prices skyrocketing; and with the Treasurer announcing that the minerals boom has topped - this is a sign that the labour market will deteriorate and unemployment will rise generally.

It was inevitable that households would try to resolve their unsustainably leveraged balance sheets. It was clear that with persistent negative savings ratios the economy was growing precariously and relying on the credit boom and the Chinese economy. Now household disposable income already squeezed by the Federal surpluses is under so much pressure from rates rises and general price rises and poor wage outcomes that it is no wonder that spending in general will fall.

The problem will get more acute because there is little sign that the Federal Government will take some spending initiative and stop dragging the economy down to its knees. They represent the antithesis of economic leadership.

Blog entry posted by bill