Low interest rates and making borrowing easier are not the panacea to our slowing economic growth.
As a large community of workers from the baby boomer generation retire, they reduce their spending. Overall economic activity will naturally slow when there is not an offsetting level of consumption elsewhere in the economy.
The next largest generation is the millennials, or those born 1981 to 1996. However, they are not able to pick-up from where the baby boomers have left off because their generation has higher levels of unemployment and underemployment. Furthermore, savings rates are higher for millennials (reducing consumption) as they continue to save to purchase residential properties – at much greater multiples to annual median earnings than compared to the baby boomer generation.
Part of our solution to this problem in Australia has been accepting higher levels of migration, combined with our birth rate, our population has been increasing steadily. However, we now find ourselves in a per capita recession. While not a full-blown recession, it does mean that our economic growth rate is lower than our population growth and in a prolonged situation, this will mean a decline in our living standards.
The Reserve Bank of Australia has been vocal in suggesting that the Federal government step-in and fill the void of dropping consumption, by using its budget (or fiscal policy) to spur on infrastructure projects. The idea being this will increase the demand for raw goods, increase jobs and deliver better facilities that should also increase productivity.
Fiscal policy, not cutting interest rate seems to be the most likely means for Australia to address its growth concerns but this will require political will! So far in Australia and around the world, governments have been reluctant to act leaving the heavy lifting to central banks, let’s hope it doesn’t take another crisis for this thinking to change.
The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.