I remember the recession we had to have. I had a boss who thought he’d threaten me with the sack when I wanted a transfer back to Sydney.
“You could be out there with all those people,” he said as he waved his arm towards the window to Little Collins Street. He hit the mark, but perhaps not as intended. I found a job at JB Were in Sydney and left.
At the same time my parents, who ran a small trucking company in Sydney, had client after client go broke on them. It threatened the very existence of a previously thriving business. It threatened their home.
It was a tough time and only by battening down the hatches, like many other Australians, did they survive. Times were so tough that the very existence of one of our major banks was threatened.
So I see the transformation of the Australian economy, 23 years without a recession, with Australians working than at any time in history, as so far removed from the mood of the early 1990s that it seems close to a miracle.
But somehow even with all the positives, consumer confidence remains stuck in the doldrums and businesses are too cautious to increase investment.
That’s because we, all of us, have psychological biases which impact our day to day lives. One of those biases is called an anchoring bias: when people compare everything they see from the lens of an initial take.
Where you anchor depends on where you’ve come from or what your experience is.
I’m anchored on the recession we had to have. That makes me cautious, leery of debt and leverage and a lot less wealthy than those who were too young to feel the impacts of Paul Keating’s recession.
This younger generation and the Australians who have followed them over the past 23 years into adulthood, are anchored on experiences of an unprecedented boom in Australia’s history, and an almost unprecedented period of growth in global history. Only the Dutch have had a better stretch of uninterrupted growth at 24 years, and we are closing in on them fast.
Perhaps that’s why with the economy growing at around 2.5% many who are used to it growing faster are a little despondent. Me, I see it as a sensational performance given the global and local headwinds as Australia transitions from the mining investment boom.
RBA Governor Stevens put the current state of the economy into some historical perspective last Friday in his prepared remarks to an American Chamber of Commerce lunch. He said:
Looking back at the history of such episodes, of which there have been a few over the past century or more, if we come through this terms of trade event with neither a major outbreak of inflation in the upswing nor a major crash in the downswing, even if we have a period of sub-average growth in the process, we will have done far, far better than in any previous event of this kind, let alone one of this magnitude. I still think that is the most likely outcome.
This recognition of how well Australia is doing, not just compared to the rest of the world but also in relation to our own massive structural adjustment, is why Stevens has taken on the role of chief economic cheerleader. It’s also why a few years back he wondered why Australians were so glass half empty not half full. It’s also why he has suggested on more than one occasion that business needs to tap its animal spirits.
Economic growth of 2 percent to 3 percent is not terrible growth. It’s just lower than what we are used to.
Which brings me to France.
Think of the French economy and you’ll probably conjure up an image of a structurally moribund economy, prone to excessive regulation in sectors ranging from farming to transport, and with a labour market that is inflexible.
That’s a stereotypical anchor so it won’t be entirely correct. But even with the Australian economy’s imperfections, France is everything Australia is not.
Dion Hershan, head of Australian equities at Goldman Sachs, noted the chasm between the two countries in a note to clients this week reflecting on his recent trip to France.
Hershan was recently in Paris meeting with industrial companies and said he was “fascinated to explore whether or not there was the will and the capacity to effectively restructure and take the necessary pain required to reinstate the competitiveness of the country.”
What he found was that even with the economic hit the French economy has taken from the GFC, the will and capacity for reform just aren’t there.
One of the companies I met with mentioned a landmark and transformational programme they put in place in 2013 which they didn’t believe could be extended. The deal took years to negotiate and resulted in:
- all employees moving to a 35 hour work week (some were previously at 32!)
- offering a voluntary redundancy/early retirement programme to about 5% of their employees which cost about €90 thousand per employee (it was untaxed, and equated to about two to three years pay)
- actually being able to shut down plants, which was a priority given that labour costs in Morocco (where they were trying to move) were 20% that of France.
They believed it was best to avoid significant changes until after the election (which is two years away!).
As an Australian used to the economically positive effects of a falling currency, Hershan assumed the Euro’s fall would also assist this transition. But he was told this business was “still significantly uncompetitive”.
From a long way away its easy to miss that fact that central banks don’t drive interest rates to zero and then launch quantitative easing because the economy is strong. Life is genuinely tough in much of Europe and still parts of the United States.
That’s something Hershan found when he was chatting with his taxi driver who had until recently owned an advertising agency that had thrived for 10 years before the GFC knocked it over. “Now he works hard but in the knowledge that over 20% of his wages go to paying his health cover, and the cost of a baguette at a local shop has quadrupled since France joined the Euro,” Hershan said.
It’s almost impossible to change someone’s anchor point. So, there is no point in hectoring them to perk up and get on with it.
But as Hershan wrote to finish off his note, “for anyone frustrated with the inflexibility of the Australian economy and declining productivity, it’s utopia by French standards.”
Equally however Australia is faced with some serious issues about the future: economically, socially, and on climate change. We can’t build a successful and sustainable economy on housing alone. We need to invest for our future and we need the government to talk calmly about these challenges.
But the starting point – our anchor, if you like – for the future is a strong one.