Why voters believe the economy is in trouble
It's long been clear from polling that the electorate doesn't regard the government as good at managing the economy.
Why this should be so is a puzzle. As Gillard rightly claimed last week: "As the global economy still splutters, unlike the rest of the world we have managed our economy so we have low inflation, low interest rates, low unemployment, solid growth, strong public finances and a triple-A rating with a stable outlook from all three of the major ratings agencies."
I've said elsewhere that part of the reason for this yawning gap between perception and reality is that many people's perception of how well the economy's being managed proceeds not from independent observation but from their political alignment. Once I know who I'm voting for I then know whether or not the economy's travelling well.
But there's another part of the explanation: the public's inability to distinguish between cyclical and structural factors. Most of the bad news we heard last year was structural in nature, meaning it changed the shape of the economy rather than its overall size, adversely affecting some parts but favourably affecting others and having little effect on most.
But such analysis is too subtle for most punters. To them, all news is cyclical: good news means the economy's on the up and up; bad news means it's going down and downer.
Add the media's inevitable predilection for trumpeting bad news, underplaying good news and totally ignoring anything that doesn't change, and structural change can't help but be perceived as an economy in trouble.
The resources boom is the classic case of structural change. It's in the process of giving us a bigger mining sector and bigger non-tradeable services sector, but a relatively smaller manufacturing sector and internationally tradeable services sector.
The mechanism that brings much of this about is the high dollar. It harms all export- and import-competing industries, but benefits everyone who buys imports (which is all of us). It marginally benefits three-quarters of our industries, which are non-tradeable (they neither export nor compete against imports) but do buy imported supplies and equipment.
Now consider the recent performance of unemployment. Over the year to December, the unemployment rate rose from 5.2 to 5.4 per cent.
Admittedly, the rate at which people of working age were participating in the labour force by holding a job or actively seeking one fell from 65.3 to 65.1 per cent. This decline in participation is probably explained mainly by some people becoming discouraged in their search for a job.
Even so, it's surprising people became a lot more worried about unemployment last year. Why did they? Because they get their impressions about the state of the labour market not from the official statistics but from stories on the TV news about people being laid off from factories.
If voters were more economically literate they'd respond to this news by thinking, "Gosh, isn't manufacturing being hit hard by the high dollar - but fortunately I don't work in manufacturing and only 8 per cent of workers do." What many actually thought was: "Gosh, maybe I could lose my job, too."
Thus was a structural problem affecting only a small part of the economy taken to be a cyclical, economy-wide problem.
It's a similar story with the much-publicised tribulations of the retailers, which arise from their need to adjust to various structural problems, such as the inevitable end to the period in which household spending grew faster than household income, and the rise of internet shopping.
With all the silly talk about "the cautious consumer" and with punters blissfully unaware that retailing accounts for only about a third of consumer spending, all the highly publicised complaints of the Gerry Harveys helped convince the public not that the retailers have their own troubles but that the economy must be going down
the tube.
Then there's the contribution of the unending fuss about "debt and deficit", in which the government has been completely outfoxed by the Liberals.
Although every economically literate person knows Australia doesn't have a significant level of public debt, the opposition has had great success exploiting the public's ignorance of public finance and of just how big the economy is ($1.5 trillion a year) by quoting seemingly mind-boggling levels of gross public debt.
With much of this argy bargy being reported by political rather than economic journalists - how many times have you heard talk of "the economy's deficit"? - it's hardly surprising the public has acquired an exaggerated impression of the economic significance of the budget deficit.
Ironically, the budget deficit is a case where a cyclical (temporary) problem has been taken to be a structural (long-lasting) one.
But Labor has to accept much of the blame for this bum rap. Rather than standing up to the nonsense the Libs were talking, it took the path of least resistance, purporting to be just as manic as they were. Then came Gillard's foolhardy decision to take a mere Treasury projection of the budget outcome in three years' time and elevate it to the status of a solemn promise.
By now, the voters' majority perception that the economy's in bad shape and Labor isn't good at managing it is deeply ingrained.
Twitter: @1RossGittins
Frequently Asked Questions about this Article…
Many voters form impressions from political alignment and news coverage rather than independent analysis. Even though Australia has low inflation, low interest rates, low unemployment, solid growth and a triple‑A rating, media emphasis on bad news and highly publicised stories (like factory layoffs or retailer troubles) make the economy seem worse than aggregate statistics indicate.
People often interpret economic news through the lens of who they plan to vote for. Once someone knows their political preference they tend to conclude whether the economy is doing well or badly in a way that supports that view, rather than relying solely on objective economic indicators.
Cyclical changes are temporary ups and downs in the economy, while structural changes permanently alter the economy’s makeup. Structural shifts (for example, a growing mining sector and shrinking manufacturing) can hurt some industries and benefit others without changing overall economic size. Investors who recognise whether developments are cyclical or structural can better judge which sectors are likely to recover and which face long‑term adjustment.
The resources boom has expanded mining and non‑tradeable services while shrinking manufacturing and internationally tradeable services. A high dollar hurts exporters and import‑competing industries but benefits import buyers and many non‑tradeable firms that use imported inputs. Investors should consider sector exposure to tradeability and currency sensitivity when positioning portfolios.
The rise from 5.2% to 5.4% is modest and occurred alongside a slight fall in participation (65.3% to 65.1%), likely reflecting some discouraged jobseekers. Media stories about specific layoffs can exaggerate the public’s fear. For investors, the key is to look at the broader labour market context and which industries are affected (for example manufacturing was hit harder) rather than reacting to headlines alone.
Retailing accounts for about one‑third of consumer spending, so retail troubles matter but don’t automatically mean consumer spending overall is collapsing. Many retailer difficulties are structural — such as the end of a phase where spending outpaced income and the rise of internet shopping — and don’t necessarily signal a nationwide consumer downturn.
The article notes Australia does not have a significant level of public debt relative to the economy (about $1.5 trillion a year), but public ignorance can make gross debt figures sound alarming. Much of the budget deficit debate has been politically driven, and the budget shortfall in this context was more cyclical (temporary) than structural (long‑lasting). Investors should consider fiscal context and scale rather than alarmist headlines.
Yes. Political messaging — for example elevating a single Treasury projection into a solemn promise or echoing opposition claims about deficits — can shape public and investor perceptions of economic competence. The article suggests such messaging helped entrench the view that the government was a poor economic manager, which can influence confidence and market sentiment even when underlying indicators remain solid.
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