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Negativity is over-inflated.



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Thu, 10th July 2008 JULIE BISHOP FAIRFAX BLOG - NEGATIVITY IS OVER-INFLATED

The Hon Julie Bishop MP Deputy Leader of the Opposition Shadow Minister for Employment, Business and Workplace Relations

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The legendary former chairman of the US Federal Reserve Alan Greenspan regarded consumer sentiment about the economy as one of the most important forecasting measures.

He said that maintaining consumer confidence is the key to softening the blow of any economic slowdown.

People's expectations about the future have a direct impact on their behaviour and on their investment and expenditure decisions.

This has obvious implications for economic activity.

If consumers and business owners feel positive about future economic conditions, they will spend and invest more, which leads to increased job numbers.

Negative sentiment has the opposite effect.

Like most things relating to human attitudes, it is not usually possible to identify a single issue that impacts on consumer and business sentiment.

One could, however, reasonably have expected the terrorist attacks of September 11 in 2001 to have a long-lasting impact on consumer confidence, given the dire predictions that the world was facing a new global threat from terrorism that would result in a global recession.

Confidence did fall significantly, however it had recovered within a few months to higher levels than before the attacks.

That example is what makes the current collapse in consumer and business sentiment so alarming.

Survey after survey this year has shown confidence falling by record amounts to lows not seen since the dark days of the 1992 ''recession we had to have'' under the previous Labor government when interest rates peaked at 17% for homeowners and almost one million people were unemployed.

Given that unemployment is currently at 30 year lows and Australia's economic fundamentals are strong, it is hard to fathom what has triggered such a major collapse in sentiment.

It is true that rising fuel prices and media coverage of the sub-prime crisis would have had an impact, but these factors alone do not compare to the dire predictions in the wake of September 11 or even the meltdown in Asian financial markets in the late 1990s.

The finger must be pointed in the direction of Kevin Rudd and his Treasurer Wayne Swan.

Throughout 2007 Kevin Rudd endorsed the Coalition Government's management of the economy and sought to adopt the same principles in his ''me-toosim'' and his infamous declaration that he was an ''economic conservative''.

Consumer confidence remained high during the election year.

Once elected, Kevin Rudd sought to denigrate the Coalition and portray us as economic vandals.

One of the major factors in the loss of confidence has to be the reckless attacks from the Rudd government on the economic legacy of the Howard government.

While it is not uncommon for governments to criticise the performance of previous governments, it needs to be tempered by consideration of the impact that can have on consumer and business confidence.

Inflation averaged more than 6% under the previous Labor Government, and was 4% on the day John Howard took office. It was 3% on the day that Kevin Rudd took office.

The Rudd Government's inflammatory language in exaggerating the inflation challenge and talking the economy down appears to have so concerned Australians they no longer feel confident about the future.

The following quote from the Prime Minister is typical of the tone and language used by the government.

''...because if the inflation monster ... begins to wreak havoc on interest rates into the future, those opposite will be dealing with the consequences of their irresponsible actions one after another as they go in idle pursuit of political populism over economic responsibility.'' (Kevin Rudd 2 June 2008)

There is a very real danger that the Rudd Government will create a self-fulfilling prophecy from its own economic scare campaign.