Cutting away from the RBA

The push from Westpac's Bill Evans for rate cuts is an important move towards stabilising the non-mining economy, but it's time Treasury and the RBA paid more attention.

Westpac economist Bill Evans is going to find it very lonely now he is telling the truth about the seriousness of the downturn in the non-mining economy in opposition to the 'we have a boom' zealots in the Treasury and, to some extent, the Reserve Bank.

Stabilising the downturn trend will require Treasury and the Reserve Bank to understand what is really happening outside Canberra and Martin Place. Bill Evans' decision to tell the truth is a very important move towards that stabilisation. All of us who live in the 'real world' are grateful to Evans and Westpac.

However, I know what Evans is in for because I have been sounding louder and louder warning bells since the beginning of March, but Treasurer Wayne Swan – on advice from his department – and the Reserve Bank have not understood what is happening. The 'we were wrong' confession from the Reserve Bank earlier this month was an important first step.

That confession in part came from the work of the Reserve Bank directors who checked what was happening outside Canberra and Martin Place. But the confession did not go far enough and I have been urging the Reserve Bank to publicly bin any thoughts of interest rate rises and start work on interest rates reductions.

The Treasury and Reserve Bank zealots still have huge influence over much economic analysis in the country but have little connection with the real world, which is where I gain my inspiration. Nevertheless, I thought I must be missing something which is why I was so relieved that Evans broke ranks with the zealots and backed me in Business Spectator (WEEKEND ECONOMIST: Going down, July 15) and the print media a day later.

I am not brave enough to make specific forecasts as Bill Evans did. All I have wanted to do is to have interest rate reductions at the top of the Reserve Bank agenda. What first led me to realise how tough times were in the non-mining economy was my anecdotal contact with a wide range of retailers, plus their suppliers, and then the revelation last March by Dun and Bradstreet that Australian businesses had slowed their payments of debts (The threat of credit shock, March 7). What the retailers were telling me was affecting the wider economy.

Then the momentum built up but took on new drive when the government launched an unprecedented nine-point assault on the Australian middle class in the budget (BUDGET 2011: Nine hits make a lethal combination, May 10; Middle Australia is suffering, May 16).

It was not only the wrong policy but came at a time when the Reserve Bank was spruiking higher interest rates. You could see this was affecting home building and dwelling demand.

Today's Liddington-Cox graph shows the spectacular fall in consumer confidence and tells the story.

Julia Gillard has no hope of selling a carbon tax in this environment and she should remember that some of the budget blows on middle Australia have not yet landed – including the attack on home building contractors and the Gonski report on education. When they land, her popularity and support for a carbon tax may fall even further.

But if Australians believe interest rates have stabilised and might fall, then you may see confidence start to rise again (depending on events overseas).

For the record, I have picked out 21 commentaries warning of harsh times – I hope I did not bore you with the repetition, but when decision makers do not understand what is happening and when the non-mining downturn momentum gathers pace you keep writing.

Back to school for the RBA, July 15

Pivoting on China's prosperity, July 12

Ejecting Treasury from an ivory tower, July 8

Waking up to rates wisdom at the RBA, July 7

Eight blows to Aussie voters, July 1

Our SMEs in a world of pain, June 30

Hanging home buyers out to dry, June 20

A slow RBA dawn, June 8

An erring RBA tempts recession, June 7

Prepare for waves of economic pain, June 3

A bank plague on all our houses, May 30

The great Aussie economic barbecue, May 26