Yesterday was not all about the Budget. An important piece of domestic data came out which (to my mind) highlighted the precarious nature of our economy.

Consider that we have had over 25 years of continuous economic growth, and skipped the recessions others faced (US, Japan, Europe) as fallout from the Global Financial Crisis. The reason we dodged that bullet was a combination of Howard & Costello (& a pragmatic Kim Beazley) leaving the Australian economy in surplus, LNG prospecting and investment, and China continuing to buy our commodities. The mining & energy sector competed for skilled (and unskilled) labour, which drove unemployment lower and wages higher. The mining boom created golden times - which had solid conditions for Australia to withstand the GFC. Check the blackline in the chart below to respective Treasurers.

This time around, we don’t have Howard & Costello, we don’t have a Budget Surplus, China sporadically buys our commodities, unemployment is higher, and our jobs earn less. Global policy to reflate individual economies (USA, then Japan, UK, & the Eurozone) has seen cheap cash, and as a result asset prices surged in the chase for return. Australians danced in the rain of cheap money, and bought property for investment (especially so in Sydney and Melbourne). However a consequence of this included the crowding out genuine home buyers. The music has gotten louder, and FOMO (fear of missing out) Australians are taking on more debt to get their piece of property.

Australia’s debt to income ratio; which shows how much households are borrowing as a percentage of what they earn (blue line), is now a staggering 189%! The chart below illustrates this growing trend over nearly 30 years.

Back to yesterday’s data…

Yesterday saw the release of Australian retail sales for March. It showed a further fall (which was unexpected) to 2% year on year growth… the slowest rate in 4 years.

Why is this so important?

Household debt may already be weighing on retail sales. Out of cycle interest rate rises by the banks and energy price shocks might already be making the household budget that little bit tighter… which suggests consumers are delaying (where possible) spending. Any reduction in spending flows on to the broader economy, as lower retail sales means shops may reduce their staff count to make ends meet. Unemployment then rises, and governments have to pay benefits instead of receiving income tax receipts. If the trend continues, then the next thing you know, we’re in recession. Eeek!

I may be jumping to some pretty quick conclusions, and the retail sales data may just be a ‘one-off’ but still highlight a deteriorating trend. With that in mind, the Federal Government’s Budget 2017 does need to spend, and does need to make spending meaningful. Energy security for business so they don’t move offshore, and infrastructure spend to assist exports make sense. Economic conservatives might argue not enough spending was cut – but I don’t think our economy is in a position to wear this. It’s just a shame this Budget was delivered in 2017 and not in 2016 (and vice versa)... We might probably be in a better position today.