The economy for retirees

In Mind Your Own Retirement, co-hosts John Deeks and Kaye Fallick talk with The Australia Institute senior economist Matt Grudnoff.

Kaye Fallick: Matt Grudnoff, the ‘Plain English Economist’ from the Australia Institute, is going to explain the economy … for people who are retired.

KF: So Matt, we’re talking really to the fact the federal government brought down an economic update. We know things change on a daily basis at the moment, but can you make sense of this for YourLifeChoices members?

Matt Grudnoff: Well, the budget update basically showed us two things. Firstly, that the economy is not doing well at all – that the coronavirus has obviously had a big impact. And GDP (gross domestic product) is not going well, it’s going backwards. And that unemployment is rising. It also showed us that the government doesn’t really know what’s going to happen in the future.

I mean, economic forecasting is bad at the best of times. The old joke says that economic forecasters exist to make astrologists look good. But at the moment, they’re particularly bad because we just don’t know how long the health crisis is going to last. And therefore, we don’t know how long we’re going to have to keep the economy shut down, or at least parts of it shut down, and so these forecasts are guesses at the best.

KF: So Matt, as a retiree, and we know that you work with YourLifeChoices on three different tribes and I’ll let you talk to them. But sitting here, say I’ve retired, how do I even get my head around how I can think about my own future, my own income? What would an entry point understanding be?

MG: Well, it depends on where you get your income. As you say, we have three tribes and basically they kind of differ by where they get their income and what sort of housing situation they’re in. So, we have people who own their own homes and get it mainly from investment sources like superannuation, and they’re likely to face an uncertain future at the moment as far as income goes. Investments during recessions traditionally don’t do as well obviously. But what the market, particularly things like the stock market, hate the most is uncertainty. And what we have a lot of at the moment, is uncertainty.

Then the other two tribes get most of their income from government pensions and they are likely to continue on at the moment reasonably well, I mean, the government’s not going to go broke or anything like that, so they will continue on. They are linked to things like the CPI (Consumer Price Index) and inflation and wages, and they’re both likely to be very, very weak. So, it’s not likely that the Age Pension will increase particularly quickly.

And then those two tribes can be broken down into those that own their own homes and those that are renting. At the moment the housing market is particularly uncertain, so rent has fallen quite substantially in the last three to six months and they’ll probably continue to fall during the recession. So that might be something good for those that actually rent.

KF: So the cash strapped tribe, people renting on a pension, nay for once be slightly, slightly better off if rents are falling. Are there any other points in there to do with household expenses or fuel that we should note?

MG: Well like everything else at the moment, the inflation rate is a bit crazy. GDP is crazy, the unemployment rate is crazy. The CPI is no exception. We’ve just seen the latest CPI data came out and it showed the biggest fall that we’ve ever seen in the CPI. It’s an odd result. What I predict, and again, I’m an economist and I’m predicting the future, we know how bad that can be, but what I’m predicting is that next quarter the CPI will see a massive rise.

And the reason is because the thing that was forcing the CPI down, well there are a couple of things. One is the fact that the government, for a period of time, made childcare free so the cost of childcare fell by 95 per cent. But of course that’s now ended so childcare fees will then jump back up. The other thing that forced it down is the fact that because nobody’s driving across the world, not just in Australia, oil prices are falling because there’s less demand, not just driving, I should say, also flying and other forms of transport. So, when oil prices go down, petrol prices have fallen, but as the economy starts to open up, we would expect that to reverse, demand will pick up and that will increase – petrol prices will increase.

Now the interesting thing about this is that people aren’t necessarily getting the advantage, particularly retirees, of low petrol prices. Retirees are probably staying at home more and travelling less. In fact, everybody’s doing that, that’s why the petrol prices have dropped down. So even though prices have fallen quite dramatically, retirees are probably unlikely to benefit from childcare costs and they’re also not driving as much so they’re unlikely to benefit from the lower petrol prices. So this big fall in the CPI is a bit illusionary almost, people aren’t necessarily getting the benefit of it.

KF: So, Matt, it’s too big a topic obviously to summarise in such a quick period of time, but on a summary note for retirees, would you say at the moment sitting tight and really familiarising themselves with indicators is the way to go? How would you be viewing your future?

MG: Look, it’s a time of uncertainty. And absolutely things are moving around, indicators on the economy are moving around, but we really don’t have a fix on what the future is going to be, particularly now with all of that uncertainty. And what we do know is that people are saving more at the moment and that’s not unusual in a recession.

John Deeks: Well there’s nothing to spend it on.

MG: That’s exactly right. So normally people save more in a recession, but in this one in particular, because if you can’t go out, you can’t go to the movies, you can’t go to the restaurants, you can’t go on a holiday, then you’ve got less to spend on. And so people are finding actually that they’ve got more money in their bank account – particularly if they’re on fixed incomes and those incomes aren’t growing up.

KF: So they are by their nature, creating a buffer in uncertain times so that as things change, they can, you know.

MG: Absolutely, but just because I’m an economist and a member of the dismal five, let me tell you why that’s bad. While that’s good for an individual as savings rise that means people are buying less stuff. If you buy less stuff, you need fewer people to make it. And so therefore not as many people are employed and the recession becomes deeper. So it’s all interconnected.

JD: Matt, let’s look towards bright skies into the future and happy days.

MG: Definitely.

JD: We’ll let you get back to your Ouija board.

MG: Thank you. Thank you very much.

Written by YourLifeChoices Writers

YourLifeChoices' team of writers specialise in content that helps Australian over-50s make better decisions about wealth, health, travel and life. It's all in the name. For 22 years, we've been helping older Australians live their best lives.

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