Analysis: BOE Haldane’s Speech Has Lessons for Australia

• Published on
• 06 Oct 2020, 11:56 AM

By Sophia Rodrigues

Bank of England chief economist Andy Haldane gave an interesting speech last week where he talked about the importance of not being overly pessimistic about the economic outlook.

“Now is not the time for the economics of Chicken Licken,” he said.

In the speech Haldane talked about the UK economy but his comments are equally relevant for Australia.

The commentary on the Australian economy has been mostly negative, ignoring some positive data in recent months. While this does not mean there are less challenges and uncertainties ahead, the bigger risk is that the constant focus on negatives could become self-fulfilling and damaging for the economy.

IMPROVED CONSUMER SPENDING BIGGEST SURPRISE FOR BOE

Haldane talks about upside surprises to UK activity in recent months, and that the biggest surprise for the BOE has been the robustness of consumer spending behaviour in the face of lockdown constraints and other risks.

Consumption had fully recovered more than a year earlier than the BOE expected as recently as in August, with even large ticket purchases such a cars and houses also back to around pre-COVID levels.

Haldane acknowledged there were clear risks to the UK’s recovery, but his concern is that perceptions of these risks among household and businesses are exaggerated.

“By creating excess caution, this has the potential to restrain unnecessarily the recovery,” he said.

“My concern at present is that good news on the economy is being crowded-out by fears about the future. This is human nature at times of stress. But it can also make for an overly-pessimistic popular narrative, which fosters fear, fatalism and excess caution. This is unhealthy in itself but, if left unaddressed, also risks becoming self-fulfilling,” he added.

AUSTRALIA DATA BETTER THAN EXPECTED

Like in the UK, some of the data in Australia, especially ones related to consumer spending and employment, have been better than expected, notwithstanding the scale of the lockdown in Victoria.

Retail sales fell 4.0% m/m in August, but it was 6.2% higher than the February level. According to the Australian Bureau of Statistics, while retail turnover has experienced volatility in monthly movements since March 2020, monthly levels recorded in the three months to August were above levels of a year ago.

Retail sales rose 7.1% compared to August 2019, with food retailing, household goods retailing, and other retailing, particularly strong in through-the-year terms.  

The National Australia Bank’s business survey for September showed conditions remain most favorable for retail industry.

The monthly labor force data has been the biggest positive surprise yet, with the jobless rate of 6.8% in August taking everyone by surprise. While the unemployment rate could still rise in the months ahead, the RBA has acknowledged it is unlikely to reach its forecast for 10% by December.

The Unemployment Expectations Index in the Westpac-MI data also tells a similar story. The index improved 14.8% m/m in September, indicating households are less worried about their employment prospects. Significantly the index has deteriorated by only 3.3% relative to the average level in the six months prior to COVID-19.

CHALLENGES REMAIN

The run of better than expected data does not mean the economy doesn’t have challenges ahead. The jobless rate may not rise to 10% and it will likely fall to 6% much earlier than the RBA expects but a decline below 5% would still be a challenge.

For the RBA it is the full employment which is well below 5% that matters because that would generate enough wage growth to ensure inflation rises sustainably to the target band.

To achieve that outcome the economy needs ample fiscal easing, and supplementary support from the RBA which is likely in November.

Still, it is striking the usually glass half-full RBA has put less emphasis on improving data points in its speeches and other publications in recent months, and more on the uncertainties ahead.

Maybe it is time the RBA does its bit to ward off unnecessary pessimism.  It would help further improvement in consumer and business confidence, and aid faster economic recovery.

--Contact: Sophia@centralbankintel.com