Will Australia have a recession?
What’ll happen to interest rates?
I have answers, and a new favourite economic theory: “F*** it” money.
Recently, banks have started re-engaging with journalists, in ways that they haven’t over the past three years.
Having meals together was largely suspended during the first years of the COVID pandemic. Now it’s on: with a lot to catch up on.
In the past few months, I’ve spent time with the leaders of large banks, influential fund managers and noted economists. Those conversations were not recorded or to be attributed to individuals.
But I’ve condensed the key things I’ve learned, below.
Markets run on two things: greed and fear.
A lot of the fear has been centred around global banking giant Credit Suisse. The share price of the Swiss company has been cut in half this year after internal turmoil and a series of scandals.
That’s a generous assessment. The bank had big losses, hired private detectives to spy on employees, laundered money for a criminal organisation in Bulgaria, faced lawsuits and paid more than half a billion dollar fine for facilitating corrupt loans in Mozambique.
The new chair Axel Lehmann says he’ll reform the company after a “horrible” year, but his name underlines the problem.
The shock bankruptcy of unrelated US firm Lehman Brothers helped blow up the US economy in 2008, leading to the global financial crisis, or GFC.
It was a hammer blow with immense consequences: our stock exchange’s key index took 12 years to recover to where it was before the GFC.
But Lehman Brothers had paid too much for assets and used accounting tricks to make its books look safer than they were. When the crisis caused the curtain to be pulled back, other banks were exposed too.
No-one I spoke to professed to have insider knowledge of Credit Suisse.
But they were emphatic that the conditions of 2008 – where other globe-spanning institutions had similar problems about over-valued assets – simply weren’t there.
They don’t see GFC Mark II. But they do see problems.
Big, big ones.
Issues in the global economy are as large as the world is wide.
In the United Kingdom the Bank of England is predicting a recession that will run from the end of this year and through all of 2023. That would be the longest recession since the GFC.
In the United States they’re more optimistic, but it might just be the weather.
Their central bank, the Federal Reserve or “Fed”, is trying to slow inflation.
But the way it’s doing it – raising interest rates – has a lot of other impacts. A report by Bloomberg Economics says a recession will hit in the coming 12 months. Normally they give a percentage of the likelihood.
That figure is now 100 per cent.
Bank figures concur with that view for both nations, although they don’t agree on the depth or the length.
And some of my conversations predate the September 23 announcement by (now former) UK prime minister Liz Truss of an unfunded tax-cutting plan so wild it caused a plunge in the value of the pound and cost her a job she’d only held for a couple of months.
Recession in Australia?
What the people I’ve been speaking to do agree on is that our problems aren’t as bad.
Inflation is an issue, but unemployment is wildly low, meaning more people than every have a wage that can help them ride it out.
Bad debts and “arrears” – people behind on their payments – are nowhere near levels that would cause the bankers I was eating with to sweat.
The interest rate expectations published by different banks are broadly in line. And those at the top rubbish some of the outliers who sweat about the Reserve Bank raising rates too sharply.
Australians have big mortgages, and if people can’t pay them … we won’t have an economy. Instead they see smaller rises, before cuts to stimulate the economy next year so it avoids the worst impacts of the global slowdown.
Wages are slowly rising, except for the staff they’re trying to hire or retain in hot fields like information technology and project management. For those roles, even “throwing money at them” – lifting wage offers sky high – can’t get them enough people.
And most are pleasantly surprised by the stable and “sensible” decisions of the new federal government, after years of swift and unforeseen policy changes from the previous one.
If there is the danger of a recession – two consecutive quarters where the economy gets smaller – they feel the government will unleash “both barrels” of spending on social and infrastructure programs to try to avoid it.
What’s going on?
But there was a persistent question: why is household spending staying up?
With rocketing inflation and soaring interest rates – hitting mortgages and rents – people have less money to spend.
Wages aren’t rising fast, so even though most people built a pandemic buffer of savings, their purchasing power is falling and they would normally trim spending as costs rise.
But they aren’t doing that – to the astonishment of some of the banking figures I spoke to.
It shouldn’t be a surprise. An economist I sat with explained it simply: using psychology and an expletive.
‘F*** it’ money
There are always uneven levels of wealth across the community, and people with lower wages – or on our pitifully low welfare payments – are seeing their lives spiral backwards. What’s called “non-discretionary inflation”, on basics like food, fuel and housing, is surging.
The standard consumer price index (CPI) used to denote inflation, is 7.3 per cent for the year to September. For non-discretionary inflation, the things we need to buy, it’s much higher.
But for those on a better wicket, spending remains high. Why?
The answer is simple – and explosive.
We’ve had two years of restrictions and unpredictability that curtailed travel, big events like weddings and general spending on restaurants, clothes and nice things.
Now, many are giving a simple response when weighing up a purchase they don’t need to survive, but want to make.
And that might be enough to keep us out of recession.