Why the RBA is So Worried

Lock-downs in Sydney/Melbourne will cost $10 billion per week

RBA Payment data for June declines by 20%

As stimulus fades the real economy is showing up

Australia’s economy shrank by 1.1% in 2020, with GDP of A$1.6 trillion.

The Australian government committed to spent 19.5% of GDP or $362 billion on stimulus programs during the Covid-19 pandemic. The majority of this money, $291 billion was spent in 2020 leaving very little for 2021/2. It’s a bit like throwing mud at a wall, some of it will stick, but how much and how long will it last?

The RBA payment data for June was release on 2nd July?– it’s the most comprehensive 'real time' data available.

Consumer, Business and Government payments in June declined by 20% in value vs June 2020.

A bigger concern is the average decline since major stimulus programs like JobKeeper stopped is 27.8%.

This is before the NSW and Victorian recent lock-downs which are estimated to cost $10 billion a week.

The most recent OECD estimate has Australia returning to ‘normal’ in March 2022 – this has to be in real doubt given the last three months with: continued lock-downs, totally botched vaccine roll out, inability to allow inbound overseas travel and ignoring key parts of the economy.

RBA's RTGS DATE

The daily processed volume was $167,465 billion the lowest number since August 2018 – if you read news sites, even the financial press not a care in the world.

Much was made of the unemployment rate decline, stats based on surveys – a deeply flawed set statistics in normal times – but in the middle of a pandemic it’s a total farce, the statisticians even continue to use seasonal adjustments – one lock-down throws them out the window??

Twelve months value is down 14.3%, while transactions are down 9%.

Basically transactions crashed in April 2020 and have not recovered – despite all the spin and bluster.

The RTGS data goes back to July 1998 - unfortunately not as far back as the 1990 recession.

Importantly the RBA’s payments data covers many of the major components of the economy including --

Wholesale debt securities.

Money market transactions.

All Stock market transactions.

All Australian dollar foreign exchange transactions.

Correspondent banking payments.

Interbank borrowing and lending.

Other bank transfers.

Mortgage payments and property transactions.

Government payments

Consumer payments – cheques, debit, credit, NPP, direct entry and prepaid cards.?

All these payments are processed through the RBA’s RTGS system and supported by the Reserve Bank Information and Transfer System (RITS) system, Swift for international payments, AUSclear and NPP inter-bank payments.

These payments show the business, import/export and government payment daily volume average fell by A$10.2 billion per day.

The payment numbers reflect lower activity in key areas of the economy.

OECD NUMBERS SHOW WHATS MISSING

The services sector in Australia has been totally decimated – even by conservative OECD numbers a decline of 42.2% has massive implications. There must be serious questions about the Australia economy in 2022 – you can only live off stimulus for so long!

MIGRATION

Migration – 262,000 net new arrivals in 2019 worth $132 billion per year; inbound tourism - worth $66.9 billion per year;?foreign students - worth $31.9 billion per year - add new car sales, cafes/restaurants, China trade war etc..... these total $272.9 billion per year or 17.2% GDP.?

Many of these categories are big city earners such as migration, tourism, foreign students etc.. - so that's trouble in 2022 or until the traffic rebounds in 2023.

Migration is a key driver for Australia – normally running at 22,000 per month currently running at 2100 – this will lead to a three year net gap of just over 950,000 migrants by March 2023. The lack of migration will have a significant impact on Australia’s population growth.

FOREIGN STUDENTS

Foreign students are another key area – before Covid-19, 586,000 students attended classes, this has declined by 14% or 84,000 in 12 months. The lack of new students will see total enrolments at?212,000 by January 2022 – this will cost $20 billion per year in figures by Mitchell Institute.

Another concern is Australia is not marketing to new students and this is showing up in preference for study – both Australia and New Zealand have a big problem, so don’t expect this market to bounce back quickly.

TOURISM AND OTHER SERVICES

Tourism the No 5 export has similar numbers down 98% since April 2020. A bigger issue is recent research shows many consumers will not return to overseas travel quickly if ever. Will the Chinese tourists come back to Australia in the same numbers given the hostile relationship between Canberra and Beijing??

Some items are long term trends which Covid-91 accelerated – for example new car sales have been in decline for 4 years.?

INCREASES IN GDP

There are plus points - increases in mining, agriculture, food/retail spend with possible internal travel - which add up to 9.5% of GDP - but it still leaves massive gaps adding up to 7.5% of GDP.

The core issue is stimulus is reducing quickly so what will lift the economy – this rests with the RBA now.

OTHER OPPORTUNITIES

There are also opportunities – get Australians to spend on internal tourism rather than going to Bali, New Zealand etc. Also 38,000 Australians stuck overseas – many would bring purchasing power with them?– others will require welfare.?

SAVINGS AND INFLATION RISK

Combine this with the record massive consumer savings, older consumers have saved the most and won’t spend much and sluggish retail sales spells trouble for banks, lenders and consumer spending.

Australians saved quickly in March 2020 – this is part of a global trend, for example US consumers have saved record levels equal to 12.4% of disposable income vs 5% the twenty year average.

The Australian household savings ratio is back at record levels not seen since the “Whitlam recession’ in 1974/5 and are twice as high as 2008/9.

While bank lending to businesses is at 5 year lows and lending over all is trending down below 2% - despite all the spin and hubris.

The chart below also explains why the RBA is not worried about house prices, in fact they are hoping for a rapid rise - anything to distract from the large holes in the economy that won’t be fixed soon. While prices have increased the overall volume is well down on recent peaks in 2015/16 also note the low participation rate from investors – despite all the hype.

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