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Driving growth
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Interest rates look set to go
lower, but will it be enough to break the consumer strike?
How do regulators kick-start the country's stubbornly sluggish
economy? A leading economist says the answer could be for the Government to
get out of the way of small business in 2020.
BetaShares's chief economist David Bassanese thinks the
Government should focus more on supporting the nation's small businesses,
rather than throwing money at households in the hope they will spend it.
Despite record low interest rates and more than $5 billion in
tax offsets pumped back to low and middle-income earners late last year,
household spending has remained stubbornly low.
"When you give money to households, you rely on them
spending and not saving it. But households are telling us they don't want to
do that. They're saving the tax cuts and the interest rate cuts,"Mr
Bassanese says, pointing to high levels of household debt and a focus on
paying down borrowings.
"A far better solution, I think, is to have more
productivity-enhancing reforms. Reduce regulation and red tape.
"The compliance burden for taxes in Australia is very
high by global standards. More pro-competition changes to the economy and an
improved tax system would give businesses more of a competitive edge."
The Business Council of Australia is running a campaign asking business owners to share
personal stories of how excessive red tape or regulation has held their
business back. The lobby group claims excessive regulation - in areas such as
payroll tax, licensing, trading hours and approvals - costs the economy $176
million each year.
Echoing these sentiments, Mr Bassanese says relieving some of
the burden on small business could help drive employment growth, boosting wages
and getting the economy out of a seemingly intractable catch-22 in 2020.
"Consumer spending can't really fire until wages pick up,
and wages can't pick up until the economy is firing. So, you need a circuit
breaker to do that - something that can stimulate growth and push the
employment rate up rather than down," he says.
At present the unemployment rate is 5.2 per cent and
expected to drift higher this year, while the RBA estimates it needs to fall
to around 4.5 per cent to fire
wage growth.
"The underlying weakness with the economy is household
income growth. That's been a feature for several years and it's finally
caught up with households and they've decided to cut back their
spending," Mr Bassanese says.
Where wage growth will come from is the big question.
Australia has had nearly three decades of recession-free growth driven by a
mining boom and a property boom.
"We don't have a replacement for either of those at the
moment," he says.
While economists don't believe Australia's enviable record is
in danger, the grinding pace of growth is causing some to question whether
more levers should be pulled to kick the economy up a gear in 2020.
Next month the Reserve Bank is expected to deliver another
interest rate cut, taking the cash rate to an unprecedented low of 0.5 per
cent, with another cut mooted for May to 0.25 per cent. After that, RBA
governor Philip Lowe has said quantitative easing
could be an option to buy up bonds and push interest rates down.
But economists are concerned monetary policy alone cannot fire
economic growth, with many calling for fiscal stimulus
from the Federal Government, urging tax cuts be brought forward along with
infrastructure projects.
Like his peers, Mr Bassanese is hopeful that - despite a laser
focus on delivering a surplus - the Government may come to the party. One
possibility is that weakness in the economy, combined with additional
spending on the bushfire crisis, could undermine predictions for a slim
surplus this year, leaving the door open for a spending boost.
"If they can't deliver a surplus, they may turn a
negative into a positive by undertaking more fiscal stimulus," he says.
Another possible boost to the economy in 2020 may come from a
significant fall in the Australian dollar as global growth recovers and
US-China tensions ease.
"I'm calling the Aussie dollar to fall to 62 cents next
year," Mr Bassanese says.
Others have pegged it around 65-70. A low dollar
would be good news for exporters, along with the country's tourism sector and
retailers located in tourism hot spots.
Winners and losers
With more of the same trends continuing in 2020 - low wages
growth, low inflation, and unemployment drifting higher - business conditions
will remain fairly stable.
Retailing and businesses that rely on discretionary spending -
restaurants and cinemas - will continue to feel the pinch.
"The housing construction area is going through a
downturn now which is likely to last through much of 2020." Mr Bassanese
says.
On the flip side, commercial and infrastructure construction
looks set to remain strong and mining investment is beginning to pick up,
which will benefit businesses servicing the mining industry.
International Tourism could also be a bright spot in 2020,
although the Australian Tourism Council has flagged concerns about how
global media coverage of the bushfire crisis could impact the country's image
overseas.
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