Business is marginal, economics is gross

There's a gaping divide between the outlook of Australia's economists and business people and while businesses watch their marginal sales collapse, government economists have their heads in the clouds.

There’s an air of growing panic among Australia’s business people. Company directors are calling for a budget deficit, retailers feel like they are peering over a cliff and everybody’s worried sick about the carbon tax and the high currency.

Metcash’s Andrew Reitzer reported yesterday that he is seeing "unprecedented and prolonged challenging operating conditions”. The IGA supermarkets are battling deflation of 0.9 per cent, with specials making up more than half of all shopping baskets and as result Metcash is laying off 478 people.

Meanwhile the Reserve Bank and Treasury are insouciant. RBA Governor Glenn Stevens merely said yesterday that "considerable structural change is occurring”, while putting off a rate cut. Treasury is working with the government to produce one of the toughest budgets in the nation’s history.

I can’t remember a time when the policymakers and the real world diverged as much as they do now.

It’s entirely possible that business people are in a funk unnecessarily and that the bureaucrats in Canberra and Martin Place have a better idea of what’s going on, but I doubt it. The truth is that both the RBA and Treasury have been getting it wrong, and both are being forced to adjust their economic forecasts downwards.

At yesterday’s RBA meeting, according to Governor Glenn Stevens: "the board judged the pace of output growth to be somewhat lower than earlier estimated”, but they stubbornly put off a rate cut anyway.

Last year’s federal budget forecast real GDP growth this financial year of 4 per cent, which now looks absurdly optimistic. For calendar 2011, growth was half that figure and there is no reason to think it will be much different for the financial year – perhaps a little more than 2 per cent.

So why do the government economists have their heads in the clouds, apart from the fact that it’s normal?

It’s partly because one person’s 'structural change' is another’s nightmare, and partly because it suits them: Treasury needs to produce a $40 billion fiscal turnaround to assist the treasurer’s political agenda and the RBA is still focused on inflation.

Business people, meanwhile, are seeing weak domestic demand because of consumer deleveraging, weak export demand because of the currency appreciation, and rising costs because of the labour laws and higher energy prices, both present and future.

To a large extent, the yawning gap between the economists and business people reflects the difference between 'gross' and 'marginal' – that is, the RBA is watching aggregate national inflation numbers while business people are watching their margins get hammered, and Treasury is watching national output, including the mining investment boom, while on the east coast, businesses are watching their all-important marginal sales collapse.

Business is a marginal game, while economics is gross.


Follow @AlanKohler on Twitter

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles