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Home / Business / An interest rate can come – and the reason it's pretty scary Greg Jericho | business

An interest rate can come – and the reason it's pretty scary Greg Jericho | business

His news of the economy is beginning to become much bleak. The latest retail data and the words of the Governor of the Reserve Bank trigger the warning circle that the economy is in danger of slowing down as households seem to respond to the ongoing lack of improvement in real income by closing the wallet.

After well over a year of suggesting that the next interest rate swap is likely to increase, Philip Lowe admitted in a speech Wednesday to the National Press Club in Sydney that the odds for a cut are about the same as for an increase.

To a large extent, this was only RBA that fell to the market. For a few months, the market has been priced at a higher chance of a surcharge than an increase over the next 18 months. Currently, the market is full pricing by 1.25% in the middle of next year and a 50% chance that it will happen by the end of this year.

Now it all seems good and good – and not so surprising given the growth in inflation. After all, lower interest rates mean lower mortgage payments.

But the reason behind why a cut can come is quite scary.

Lowe outlined two – in his view, equally probable – scenarios. The first is where the "labor market is strong, people's income is starting to rise, inflation will rise". If that happens, the next interest rate will increase, and basically everything will be fine.

The second scenario is one where "revenue growth does not pick up, housing market weighs on spending and people do not want to invest". If that happens, Lowe suggests that the interest rate will happen, and that will mean several years of weak wage growth and fixed real income coming.

He suggests the likelihood that both cases occur "is pretty much the same". A 50-50 bet. Heads we win, tails we lose …

It's not all that is reassuring to know that the chances of things going bad are as likely as they go well – especially when the budget numbers depend on being more than good . 19659003] Take wage growth.

In the middle of this year's economic and fiscal outlook, the Treasury considers that the annual salary in mid-2020 will be 3%, and in mid-2021 it will be up to 3.5%. This figure combined with employment growth supports the estimates for income tax.

But instead of 3% and 3.5%, the governor achieved a graph of RBA's estimates that showed wage growth by the end of 2020 to be just over 2.5% and by mid-2021 is around 2.75%.

And the lack of wage growth is very much to be felt in the economy as households reduce their spending.

December each year is the great month for retail shopping. Christmas sees us breaking out the credit card and spending a lot more than in another month. That is why it seems a little strange to hear a small growth in retail sales in December.

The reality is every year there is a big increase in actual expenses in December compared to November:

But the original data is not much use for us, which is why ABS adjusts it to take into account seasonal factors – like the fact that every year we spend more in December than any other month.

We are actually using less in December than we used to. Back in the 1980s, December accounted for more than 12% of annual spending – equivalent to about six weeks to spend at other times of the year. Now it's worth just over five weeks:

But that shift doesn't negate the bad news about the latest details.

In December, in seasonally adjusted terms, spending rose by only 0.1% and 0.2% in the trend. Monthly trend growth marked 11 months of declining growth – the longest stretch recorded goes back to 1982:

To some extent, this is not surprising – inflation growth is so weak that it is almost difficult to continue to increase spending because prices are not rising For many goods – or at least they do not go as fast as they used to. Therefore, the quarterly retail sales figures were more worrying as they looked at the volume of sales rather than the money spent. In this way, they more closely match household consumption, which consists of GDP figures.

Our economy is essentially an expense. Slightly below 60% of GDP consists of household consumption. Now it is much more than just retail – insurance, health, education, tools etc are also included in household consumption – but the two are relatively closely related, and the news is not good for next month's GDP figures:

In trend Terms , revenue turnover in December last year increased by only 0.27% – the worst result since March 2011, and annual growth shows a clear slowdown:

The declining also occurred over almost all states – revenue actually fell in NSW for the first time since June 2011, and only Queensland showed signs of solid improvement:

All this adds a picture of households that have stopped using even when employment is growing. It highlights how real income has failed to grow and households now use as they do not expect them to grow any time soon.

For now, the chances of a price decline are maybe 50-50, but if the news does not make it better, these odds will fluctuate sharply. Reserve Bank will hope further record low interest rates will be the art of encouraging people to open their wallets.

Greg Jericho is a Skyscraper from Guardian Australia

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