With the economy, the truth is out there | Article | The Punch

Struggling to get a handle on where the economy is heading? Don?t beat yourself up about it. You?re facing an uphill battle. Nobody tells the truth about the economy.

All the main sources of economic information - politicians, business people, economists and even journalists - are hopelessly conflicted when it comes to talking honestly about the economy. Let me lift the veil a little.

It shouldn?t shock you to learn politicians often bend the truth, particularly on such a hot button election issue as the economy. The political Punch and Judy show over government debt is a good example.

The Opposition would have you believe reckless spending has pushed the government?s finances to the brink, creating unsustainable levels of debt that will be passed to your grandchildren?s grandchildren. The government has unwittingly played into its hands with its dogged obsession to produce a budget surplus in this financial year, however slim.

In truth, the federal government?s net debt position (the value of its debts minus assets) is, at 9.2 per cent of gross domestic product this financial year, low compared to the rest of the world.

In fact, the very creditworthiness of the Australian government is pushing up demand for government-issued bonds, and, in turn, the Australian dollars needed to buy them. This is actually causing headaches by adding to upward pressure on our already turbo-charged Aussie dollar.

Global investors are so confident in the government?s stability they are lending to the government at an ultra low interest rate of about 3 per cent. Imagine if your mortgage rate was 3 per cent ? how worried would you be about your debts?

But what can we learn of the economy through our esteemed leaders in business? Without wishing to labour the obvious, businessmen and women too are hardly impartial observers. They talk their own book, announcing job cuts on the eve of state budgets expected to contain tax increases for them. Hello Queensland.

The Australian business community has discovered in recent times just how easily lily-livered politicians can be bullied into backing down on decisions that adversely affect their shareholders? interests. And fair enough too, business people should seek to maximise shareholder returns. It?s just that everything they do and say must be seen through that prism.

Economists too can play pretty hard and fast with the economic truth. Private sector economists ? those sharp-suited talking heads in bank trading floors you see on your television every evening ? are paid to come up with a view on what is going to happen with the economy. Financial traders for that bank can use this view to inform their trading.

But it?s also like a glossy brochure for potential clients for the bank ? they see your chief economist?s mug on television sounding confident and knowledgeable about the economy and decide they want your bank to manage their money. Nobody wants to invest with the guy who simply admits it?s not clear where the economy is going.

And so economists tend to adopt a position on where they think the economy is heading and parse every data release for evidence to back up that prediction. Economists who have pronounced on television that interest rate cuts are imminent see weakness in every new release. Those predicting no rate cuts see only strength.

But maybe you think we can rely on journalists to always tell the truth? Well, sorry to disappoint, but we?re human too. Reporters face what economists call a ?perverse incentive? when it comes to reporting economic data in that a bad news stories can often win a front page position; good news stories are relegated to down page 16.

Indeed, the entire media industry, with its heavy reliance on advertising from the retail and property sectors ? both in structural decline thanks to lower household debt appetite ? seem to have a glass-half-empty view of the economy at present. It is a mark of the editorial independence of our major newspapers that they run so many bad news stories when it would actually be in the newspaper industry?s commercial interests to tell a more upbeat story.

I say all these things not to tip anyone into hot water or to dissuade you from reading newspapers. The truth is economic forecasting is inherently difficult ? that?s why economists are notoriously so bad at it. At the end of the day, the Australian economy is a sprawling entity of 22 million people trading, transacting, hiring, firing, buying and lending each day.

These decisions are, in turn, affected by the decisions of some 7 billion other individuals worldwide. Only fools pretend to know with any precision what they will all decide to do tomorrow.

The best we can know for now is that the Australian economy hit a weak spot recently due to sharp falls in prices international buyers are prepared to pay for our major exports of iron ore and coal. As a result, mining companies have begun pairing back investment plans and laying-off some workers. This change in economic temperature may well prompt the Reserve Bank to cut interest rates as early as next month.

But it depends.

It depends on whether commodity prices recover in the coming month ? iron ore prices enjoyed their biggest one-day gain on Monday ? and how the Australian dollar responds.

If commodity prices stay low and the dollar fails to ease by much ? as it has to date ? then it is entirely possible the Reserve Bank will act to stimulate the economy, and soon.

But should commodity prices rebound or the Australian dollar fall materially, this could buy the Reserve Bank some more time to see the impact of previous rate cuts.

But don?t take my word for it.

Twitter: @Jess_Irvine Email: jessica.irvine@news.com.au

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Source: http://www.thepunch.com.au/articles/with-the-economy-the-truth-is-out-there/

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