Q+A: Why the economy's not as bad as you think
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Why do the hosts say the economy 'isn't as bad as you think'?
Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics and more. I'm Michael Thompson and good morning, Sean Aylmer.
Good morning, Michael.
Sean, I don't think I'm incorrect in saying that there is a lot of negativity out there. We talk a lot about kind of the miserable consumers that we all are, kind of poor confidence, inflation still being too high, but behind all of that and behind a lot of the headlines The economy isn't necessarily as bad as you might think, right? And so today, I want to look across the course of the next five or six minutes at why that is so. So maybe it's best if we do this as like a pros and a cons list. Okay. Perhaps. Good idea. All right. Let's start with the cons, the things that are actually really weighing us down.
So the big one right now, today, is the price of oil, energy prices. And we saw late in the week another, yet another spike in the price of oil towards that $100 a barrel mark. We know why. That's all about the Strait of Hormuz being closed, not being able to ship oil through there. 20% of oil goes through there. Therefore, you have less oil. You still have the same demand. The price goes up. That is the immediate fear. The midterm fear is that that price of oil leads to inflation across economies. And the big, big downside risk to our economy is inflation number one, inflation number two, and inflation number three. If inflation... stays high, you are going to get higher interest rates and that will slow your economy.
It's not just inflation for inflation's sake. It's how people think about the future. If people think there's going to be higher prices, they bargain for higher wages. They go to the grocery store and they see that bananas are $4.99 a kilo, not $3.99 a kilo, and are prepared to pay for it because that's what they expect. So this whole inflationary expectation thing is is a real kind of short to medium to long-term risk, and it is the biggest issue for Australia. We've also got this massive housing correction, Michael. Sydney and Melbourne in particular, Canberra too. In fact, all the cities that you seem to have lived in at some point seem to be correcting at the moment.
Yeah.
I have never been personally blamed for a housing correction before, but hey, you know what, I'll take it. But I suppose that's one of those things that, yes, that is going to weigh on people, particularly if you own a home and the wealth effect isn't there. I suppose it works in reverse then, doesn't it? It makes you feel less wealthy. But for some people, that is actually going to be potentially a good thing, a bit of a reset and allow the affordability challenges to be overcome for a lot of people. So there's pros and cons within a lot of these individual categories almost.
Certainly in housing, because first home buyers will love the fact that prices aren't going up. They're falling in, we said Sydney and Melbourne and Canberra, they're not falling in Adelaide. That's really bucked the trend. It's that those prices are still surging. Perth Brisbane, they're still rising as well. The momentum has come out though. So really, you asked about the cons of the economy at the moment. What's happening to energy prices? What's that mean for inflation and the housing market? So broadly, they're the cons.
Can I ask, where would you put productivity into? Is it a con in that it's a challenge that we haven't been able to fix yet, that it is a bit of a handbrake until we are able to kind of get a handle on how to be more productive?
I mean, productivity probably sits underneath, you know, when you build those houses, which are supposed to give you your frameworks for your businesses. And the bottom base is productivity. The foundations of most organizations need to be productivity.
What short-term economic risks do rising oil and energy prices create?
It is too weak. It has been too weak for many, many years. Productivity really simply is if you put a bunch of stuff in, how much stuff do you get out? If you can do it more efficiently, so the stuff you put in results in more stuff coming out, then you're being productive.
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