As we wait to see whether the Reserve Bank’s 0.5 point interest rate cuts and the government’s tax cut package will push the economy out of its torpor, keep an eye on the prime minister’s home state of New South Wales.
The first stage of the tax cuts package is expected to inject around $7 billion into the economy over the next few months — much smaller than the Rudd government’s stimulus packages in response to the financial crisis eleven years ago, but aimed entirely at low and, particularly, middle income earners, who are much more likely to spend their tax refunds than high income earners. At most, a third of the tax cuts, or around $2.3 billion, will end up in NSW, which desperately needs stimulus.
The seasonally adjusted retail sales figures for May released last week show that retail sales in NSW fell slightly from April. Worse, they still remain under the level of 10 months ago. In May, retail turnover was $8.70 billion, against $8.72 billion in August last year, back when Malcolm Turnbull was prime minister. That $25.5 million may not seem much in the scheme of things, but retail sales in all other states have now recovered to be higher than they were last August. NSW is also the market where, according to CoreLogic, the property market is down 9.9% in the past year against a national slide in values of 6.9% and an 8% fall for the capital cities.
And while jobs growth has been strong in NSW, it is lagging Victoria in both the pace of jobs growth and wages growth across the public and private sectors.
Retail spending nationally also adhered to a pattern established several years ago: more spending on food — via increased spending in supermarkets, cafes and takeaway food — but flat or falling spending in areas like household goods, hardware, electrical, clothing and footwear. Will the tax cuts end up in restaurant meals and supermarkets, or boost sales of whitegoods and the famous plasma TVs of 2008?
If the latter, then much of it will flow to offshore manufacturers and suppliers (such as LG, Samsung, Sony, Apple, Microsoft etc). Ditto if some of the refunds are spent on overseas travel. Nor will the $1080 handout do much to help the seriously recessed new car market, where sales in the first six months of 2019 are down nearly 10% from the same period in 2018. It also won’t help (nor is it designed to) the manufacturing sector, which has been facing its very own recession over the last year as employment and output slows.
Another worry is if there’s bad economic news in the next couple of months that encourages households to hang on to their cash rather than spend it. Poor jobs data or a poor June quarter GDP figure due in early September might put a serious dent in consumer confidence at the exact moment the government is hoping to get us out and spending again.
Jobs vacancy data released last week got lost in the obsessive focus on the tax cuts, but job vacancy growth slowed dramatically in the three months to May to just 0.3% — a year ago the growth rate in the May quarter was 4.1%. At a seasonally adjusted 241,500, the number of job vacancies is now back at November 2018 levels, signalling that three quarters of poor GDP growth and persistent household income stagnation is finally pulling our strong jobs growth — which has been the government’s greatest economic achievement — back to earth.
A fall in the participation rate from current record levels — another welcome achievement by the government — might offset the decline in jobs growth, but a rise in the unemployment rate is possible in the next few months. And if that happens, the tax cuts won’t be enough.