A short, sharp recession due, but we're a safer bet

Over the past five years, "the amount of money that Australian households had left over to spend, after paying taxes and interest on all their loans, grew in real terms at the fastest rate in over 30 years".

This was due to fast growth of wage and salary incomes (average 7.5 per cent per annum), fast growth of income from investments (17 per cent a year, apart from capital gains on shares), tax cuts and modest inflation.

Real disposable income grew at an astonishing 6.1 per cent annually. This growth greatly exceeded that of any other developed economy - US growth was half this, for example.

Furthermore, strong growth was evenly spread over the income levels. Growth was reasonably egalitarian.

Of necessity growth will be far slower for the next year or so, but then should pick up again. "Australia remains, after all, a very dynamic economy."

Battellino looks carefully at household balance sheets. Assets are far higher than liabilities.

Assets are largely in market-linked investments, mostly shares whose performance over the long term greatly exceeds that of fixed interest.

Battellino's conclusion is relatively cheery. "While nobody can predict accurately all that lies ahead, it is important not to become too pessimistic because, fundamentally, household finances and the economy more generally remain in good shape. The main problem that had built up - inflation - is manageable and is being dealt with."

In the body of the talk is the warning shot: "... there is still a big task ahead to bring inflation down and this could limit room for manoeuvre on monetary policy".

Holding at current levels would be a safer bet for the economy, but a riskier bet politically.

Henry's bet is that the Reserve Bank will cut the cash rate by another 50 basis points today.

Sources: Australian Consumer Confidence (1973-2008) - roymorgan.com; US Consumer Confidence (1977-2008) - The Conference Board - conference-board.org