While the economists watch the big picture, real companies are struggling: Kohler

There’s an air of growing panic among Australia’s business people. Company directors are calling for a budget deficit, retailers feel like they are peering over a cliff and everybody’s worried sick about the carbon tax and the high currency.

Metcash’s Andrew Reitzer reported yesterday that he is seeing “unprecedented and prolonged challenging operating conditions”. The IGA supermarkets are battling deflation of 0.9%, with specials making up more than half of all shopping baskets and as a result Metcash is laying off 478 people.

Meanwhile the Reserve Bank and Treasury are insouciant. RBA Governor Glenn Stevens merely said yesterday that “considerable structural change is occurring”, while putting off a rate cut. Treasury is working with the government to produce one of the toughest budgets in the nation’s history.

I can’t remember a time when the policymakers and the real world diverged as much as they do now.

It’s entirely possible that business people are in a funk unnecessarily and that the bureaucrats in Canberra and Martin Place have a better idea of what’s going on, but I doubt it. The truth is that both the RBA and Treasury have been getting it wrong, and both are being forced to adjust their economic forecasts downwards.

At yesterday’s RBA meeting, according to Governor Glenn Stevens: “the board judged the pace of output growth to be somewhat lower than earlier estimated”, but they stubbornly put off a rate cut anyway.

Last year’s federal budget forecast real GDP growth this financial year of 4%, which now looks absurdly optimistic. For calendar 2011, growth was half that figure and there is no reason to think it will be much different for the financial year – perhaps a little more than 2%.

So why do the government economists have their heads in the clouds, apart from the fact that it’s normal?

It’s partly because one person’s ‘structural change’ is another’s nightmare, and partly because it suits them: Treasury needs to produce a $40 billion fiscal turnaround to assist the treasurer’s political agenda and the RBA is still focused on inflation.

Business people, meanwhile, are seeing weak domestic demand because of consumer deleveraging, weak export demand because of the currency appreciation, and rising costs because of the labour laws and higher energy prices, both present and future.

To a large extent, the yawning gap between the economists and business people reflects the difference between ‘gross’ and ‘marginal’ – that is, the RBA is watching aggregate national inflation numbers while business people are watching their margins get hammered, and Treasury is watching national output, including the mining investment boom, while on the east coast, businesses are watching their all-important marginal sales collapse.

Business is a marginal game, while economics is gross.

This article first appeared on Business Spectator.