Category: Business

So, the economy is rolling on normally until governments suddenly order us to lock down. Obviously, this will involve many people losing their jobs and many businesses losing sales. It will be a government-ordered recession.

Since it’s government-ordered, however, governments know they have an obligation to provide workers and businesses with income to offset their losses. Fearing a prolonged recession, governments spend huge sums and the Reserve Bank cut the official interest rate to almost zero.

Get it? This was a government-ordered restriction of the supply of goods and services, but governments responded as though it was just a standard recession where demand had fallen below the economy’s capacity to produce goods and services and needed an almighty boost to get it back up and running.

The rate of unemployment shot up to 7.5 per cent, but the national lockdown was lifted after only a month or two. As soon it was, everyone – most of whom had lost little in the way of income – started spending like mad, trying to catch up.

Unemployment started falling rapidly and – particularly because the pandemic had closed our borders to all “imported labour” for two years – ended up falling to its lowest rate since 1974.

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So, everything in the garden’s now lovely until, suddenly, we find inflation shooting up to 6.1 per cent and headed higher.

What do we do? What we always do: start jacking up interest rates to discourage borrowing and spending. When demand for goods and services runs faster than business’s capacity to supply them, this puts upward pressure on prices. But when demand weakens, this puts downward pressure on prices.

One small problem. The basic cause of our higher prices isn’t excess demand, it’s a fall in supply. The main cause is disruption to the supply of many goods, caused by the pandemic. To this is added the reduced supply of oil and gas and foodstuffs caused by Russia’s attack on Ukraine. At home, meat and vegetable prices are way up because of the end of the drought and then all the flooding.

Get it? Once again, we’ve taken a problem on the supply side of the economy and tried to fix it as though it’s a problem with demand.

Because the pandemic-caused disruptions to supply are temporary, the Ukraine war will end eventually, and production of meat and veg will recover until climate change’s next blow, we’re talking essentially about prices that won’t keep rising quarter after quarter and eventually should fall back. So surely, we should all just be patient and wait for prices to return to normal.

But it’s our misdiagnosis of the “coronacession” that’s left us with demand so strong it’s too easy for businesses to get away with slipping in price increases that have nothing to do with supply shortages.

Why then are the financial markets and the econocrats so worried that prices will keep rising, we’ll be caught up in a “wage-price spiral” and the inflation rate will stay far too high?

Short answer: because of our original error in deciding that a temporary government-ordered partial cessation of supply should be treated like the usual recession, where demand is flat on its back and needs massive stimulus if the recession isn’t to drag on for years .

If we’d only known, disruptions to supply were an inevitable occurrence as the pandemic eased. What no one foresaw was everyone cooped up in their homes, still receiving plenty of income, but unable to spend it on anything that involved leaving home.

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It was the advent of the internet that allowed so many of us to keep working or studying from home. And it was the internet that allowed us to keep spending, but on goods rather than services. It’s the huge temporary switch from buying services to buying goods that’s done so much to cause shortages in the supply of many goods.

But it’s our misdiagnosis of the “coronacession” – propping up workers and industries far more than they needed to be – that’s left us with demand so strong it’s too easy for businesses to get away with slipping in price increases that have nothing to do with supply shortages.

Now all we need to complete our error is to overreact to the price rises and tighten up so hard we really do have an old-style recession.

Experts and analysts have been left to reconcile the recent retail exuberance with the storms that many, including the nation’s treasurer, are predicting.

This week’s consumer price index figures showed new dwellings and fuel are contributing most to the inflationary environment, but the price of goods is also rising faster than services, up 2.6 per cent for the quarter.

The CPI figures may have been lower than forecast, but they still clearly outline the cost-of-living pressures Australians are feeling.

Categories that benefited enormously from COVID lockdowns, such as furnishings and household equipment, are having some of the biggest price jumps.

Jarden retail analyst Ben Gilbert says the spending of the past few months has been driven by happier economic conditions.

“The last quarter or so of trading has been very strong. That is due to pent-up demand, strength of the housing market and significant price increases [for products]. You wrap all of that up, and spending has remained pretty resilient,” he said.

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Those trends won’t be around forever, though.

“We are going to have a few more months of falling house prices. Then you are going to have people get their utility bills, and you have the risk that the government takes off the fuel excise discount,” Gilbert said.

Oscar Oberg, portfolio manager at Wilson Asset Management, agrees there is some weakness coming for the sector. But investor expectations have been low, and consumer stocks were sold down towards the end of last year, meaning there is room for companies to surprise.

“We think it could be quite a good period for retail given share prices have significantly corrected and are predicting a very negative outcome, so you have to put that into context,” he said.

Consumer electronics businesses such as JB Hi-Fi and Harvey Norman had been clear winners during lockdowns, when Australians rushed to buy home office equipment and entertainment products. Now it’s about looking at which companies did not benefit from coronavirus lockdowns, Oberg says.

“It’s now about those companies who are exposed to ‘going out’ apparel – dresses, suits, jackets and that kind of retail.”

“I would say companies like Universal Store [could benefit] – where they are exposed to clothing for people aged 18-30. Lovisa as well, it is a fast fashion jewelery retailer that is going well and is a global business.”

Old habits die hard

Australians have been feeling cost-of-living pressures for months. Petrol prices have been an issue since before the last federal election, when the then-Morrison government temporarily cut the fuel excise.

Mortgage holders have been hearing warnings of interest rate rises earlier in 2022, with the Reserve Bank of Australia making its first move on an increase in June.

Throughout this time, strong retail figures kept filtering through. Australian Bureau of Statistics figures showed spending hit record highs in May at $34.2 billion – a figure which stayed steady for June.

Gilbert says it will take a bit of time for economic challenges to filter through to consumer mindsets.

“It takes people a little bit longer to curb their spending at the moment. It will probably just take people a bit of time to come to the realization [of these rising costs],” he said.

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McKinsey & Company have also been tracking how Australians have emerged from lockdowns. While there is caution about the path back from COVID-19 disruptions, researchers found people have been planning to spend in ways they might not have been able to previously.

A McKinsey report on consumer behavior this week showed a bounceback in consumers’ intent to spend in areas such as apparel, flights and out-of-home entertainment in the next two to three months.

Associate partner at McKinsey & Company Abe Levavi said shoppers are showing a tendency to maintain the online shopping habits they built during lockdowns.

There’s also room for the “omnichannel” trend to grow, where customers connect with companies online and in-store, often planning their purchases online first.

“We looked at customers who are purchasing directly from social media. From before the pandemic that has grown by 15 per cent, which is quite a large number. Eighty five per cent of customers who are making these purchases directly from social media say they intend to continue doing that,” he said.

Hints of a slowdown

Shares in online marketplace Kogan.com surged by more than 45 per cent on Thursday after the company delivered a trading update, but its numbers showed that the big growth it had during the pandemic was slowing down.

Kogan confirmed it expects gross sales to be flat on last year, growing by 0.1 per cent, while profits were 9.4 per cent lower.

Other hints of a slowdown also emerged in Australia and overseas this week. ABS retail trade figures did not show an overall decline in June compared with May, but some categories dipped. Spending in retail stores fell 3.7 per cent after a big surge, while household goods sales were down 0.3 per cent.

Meanwhile, US retail giant Walmart issued a profit warning, with chief executive Doug McMillon saying “increasing levels of food and fuel inflation are affecting how customers spend”.

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Tough conditions indicate discounting is to come as the company looks to clear stock – which has a flow-on effect for profits.

Morningstar analysts saw Walmart’s trading update as a signal of what’s to come.

“We see the warning signs that we’re seeing in the US, just like everyone else, and we think the writing is on the wall,” Morningstar’s Johannes Faul said in a video update this week.

“The momentum we see is going backwards and that spells trouble for earnings in the consumer discretionary market.”

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