Where to now for the economy?

There was no surprise in the Reserve Bank of Australia announcing on Tuesday, it is about to hike interest rates up by another 0.25 per cent, in what seems like an increasingly futile attempt to haul in inflation.

The reasoning behind these rate hikes is that the Reserve Bank does not want higher inflation to become ‘baked in’ to the economy, where everyone expects prices to rise and so they start increasing their own wages or prices to compensate.

It might be too late with the Reserve Bank itself facing a fresh wage increase demand of 11 per cent over three years, including an “inflation protection mechanism’ that will trigger extra increases if inflation outpaces wage growth.

Many economists are now asking if monetary policy, the ability to rise or cut interest rates, is an effective tool in a modern economy to control inflation. It is a blunt instrument that hits families hardest and discourages young Australians from buying their first home.

More, do the authorities at the Reserve Bank really believe a spike in unemployment, and all the financial distress this causes, is justified if it brings inflation down below 3 per cent.

Pain is already being felt in the retail sector, one of the largest employers in Australia. Katies, Noni B, Cue, Rivers and Millers have all gone bust with Barbecues Galore, Aussie Disposals and Tupperware all following close on their heels.

At the same time as the Federal Government is claiming it is doing all it can to ensure more houses are being built where Australians want to live, construction companies are going bust in their droves.

Bathla Group, the residential developer and builder of affordable homes in Sydney has collapsed with some $3.4 billion in debts while Novati Constructions and Beechwood Homes in NSW have followed them into liquidation.

Where will it all end? The Intergenerational Report which was released in September suggests it will end in fewer babies being born, more older Australians needing home care and formal aged care and Australia’s standard slowly slipping lower.

There is some hope new technology, led by AI innovations, will turn back the tide and prompt a much-needed rise in productivity, but this is difficult to see as technology companies also struggle in the prevailing conditions

A new approach is needed. One that focuses on reduced government spending, a taxation strategy that encourages investment and business activity and clear reduction of red tape.

Let’s hope someone in Canberra is listening.