Do you ever feel like when you are listening to news about the economy, you have to try decipher what is being said as if it's a complex code. We get it! In this guide, Economist Nicki Hutley helps to unravel the tangled web of economic jargon so that you can decode financial news, and even any decisions you may face when it comes to work, spending or investing. Buckle up for the crash course in economic know-how!
Byline: Nicki Hutley
Being able to understand economic concepts is a powerful tool that you can use in making decisions when it comes to your work, your purchasing choices, and borrowing and investing money. You might hear politicians often using economic jargon, so it can also help to better understand what they are talking about. In saying this, often economists don’t make it easy to understand, so this is why we’ve put together a quick guide of commonly used terms that we feel could be useful to you.
Monetary Policy - The RBA (the Reserve Bank of Australia) will use monetary policy to try and steer the economy in the right direction when the economy is either running too hot, meaning high inflation, or too cold, meaning high unemployment. There are 3 ways they do this, but the most common which you are likely to know all about, is setting interest rates (also referred to as the cash rate, which we will explain further in the next point).
Higher rates make borrowing more expensive, so people and businesses tend to spend less, which can help stop the economy from overheating. Conversely, when the economy needs a boost, like when people aren’t spending much and businesses aren’t growing, the RBA might lower interest rates. Lower rates encourage people and businesses to borrow and spend more, which can kickstart economic activity.
Cash Rate – The cash rate is the interest rate that banks pay to borrow funds from other banks. It is set by the RBA board at each of their meetings. Although this sounds pretty boring, it tends to get a lot of attention in the media, and this is because the cash rate is what influences all the other interest rates, such as mortgage and deposit rates. When the cash rate goes up or down, this will typically flow through to the rate you’re charged for your mortgage, your personal loans and credit cards.
Inflation – Inflation is probably a term you’re familiar with; it measures the rate at which prices change over time. The Consumer Price Index, or CPI, is the main measure of inflation. The CPI is made up of the changes in the price of hundreds of different average household goods. This includes things such as bread, fruit, meat, beer, toothbrushes, hairdresser services, school fees, BBQs, electricity, cars & petrol to name a few.
Some prices will go up while others will come down in any one period.
The RBA has a target for ‘underlying’ inflation, which takes out items that tend to jump around a lot—such as petrol and some foods—of 2% to 3%. When inflation is higher than this target and rising, the RBA is likely to increase the cash rate.
Gross Domestic Product – The measure of the size of our economy is called Gross Domestic Product, or GDP. GDP is reported every 3 months and tells us how individuals, businesses and governments have spent and invested their money. This report covers everything from toothbrushes to roads.
GDP tells us which parts of our economy are doing well, and what parts aren’t doing so well. Economists are mostly interested in seeing how GDP changes between one period to the next and whether we are in a period of growth or not. If the GDP falls for 2 quarters in a row, that is defined as a recession.
Something else economists sometimes talk about is “trend growth”. This indicates how fast the economy can grow without setting off inflation.
Stagflation – Stagflation is a term that was created in the 1970’s to describe a period when economic growth is low, or shrinking, yet inflation is high. Stagflation doesn’t happen very often fortunately. An example of stagflation is in 1983 when inflation hit 11%, but the economy was in a recession.
Productivity – Productivity is one of the most important economic indicators. It measures how much is produced for each hour worked. We’re sure you’ve heard the saying “work smarter not harder”, well when we work “smarter” productivity goes up. This is important as productivity is one of the key ingredients for improving our standard of living. When we see a rise in productivity, we see businesses doing better and this means profits and/or wages are higher as a result. Sounds ideal right? So, how do we get productivity to grow? Increasing investments into machinery and technology that help us do our jobs more efficiently, we can make improvements to the way businesses operate and we can invest in upskilling people. Productivity can also be improved by governments, by making it easier for businesses to do business through investing in infrastructure such as roads and telecommunications.
Fiscal Policy – Think of Fiscal policy as the government’s wallet and spending habits. Just like how you manage your own money to buy things or save for the future, the government uses fiscal policy to control spending, taxes, and borrowing to keep the economy in good shape. Fiscal policy is balancing what people want or need from the government (such as schools, hospitals, roads, defence and childcare to name a few) with the requirement of paying for these things through taxes – taking into account the overall effect of those decisions on the economy.
A very important day for the fiscal policy calendar is the second Tuesday in May. This is when the federal government hands down its budget. When the government spends more than it receives, the budget will be in deficit leading to an increase in debt.
Labour Force – The Labour Force is the number of people who are working (employed) or aren’t working but looking for work (unemployed). You’re counted as employed by The Australian Bureau of Statistics even if you work just one hour per week, and you don’t count as unemployed unless you are looking for work. If you aren’t applying for jobs or working for any reason, then you’re not counted as a part of the labour force.
Underemployment – Unemployment, as previously mentioned, is the number of people actively looking for work. This is reported monthly basis as a percent of the labour force.
There is a concept called underemployment which refers to the people who work part-time but seeking more hours. When you add together the unemployment and underemployment, you get the underutilisation rate. Policy makers will look closely at this rate to see if there is likely to be wage pressure, which could lead to inflation.
Exchange Rate – If you’re an avid traveller, you’ll know this term very well and probably keep a close eye on it. The Exchange Rate refers to how much you would get if you were changing your Australian dollars into another country’s currency, or vice versa.
If you’re lucky enough to have a trip overseas planned soon, you’ll be following the exchange rate for your destination, so you can map out costs while you are there.
Another time you may encounter exchange rates is when you’re buying something from overseas (imported goods) which could a piece of clothing, a car or petrol. When the Australian dollar falls, we pay more for imports.
Cryptocurrencies – Cryptocurrencies can only be accessed via computers or other electronic devices and don’t have a physical form like banknotes or coins. The most commonly known cryptocurrency is Bitcoin. They are often referred to as “cryptos”. It’s important to know that it is not the same as ‘real’ money, and is not regulated in Australia. Cryptocurrencies aren’t a very useful form of money as most sellers won’t accept cryptocurrencies as payment. Cryptocurrencies are often very volatile, compared to the Australian dollar that generally doesn’t move by much day to day.
Together, we’ve delved into the intricacies of some key economic concepts and terms that are frequently used when discussing the state of the economy and its impact on our lives. Deciphering the complexities of economics isn’t just about unravelling jargon; it's about equipping you with the knowledge to navigate the economic currents shaping our lives. I hope this explainer helps you to more confidently steer through these economic waters and traverse the complexities of our financial world.
At Horizon Bank, we believe in empowering our customers with the knowledge and resources they need to make sound financial decisions. Understanding economic terms and concepts is crucial, but having a trusted financial partner can make all the difference. Whether you're planning your next investment, considering a loan, or simply seeking some guidance on navigating the current economic climate, Horizon Bank is here to support you. Visit our website at Horizon Bank or come into one of our local branches to learn how our personalised financial services can help you apply your newfound economic insights in practical, profitable ways. Let's decode the world of finance together.
Horizon Bank has a branch network spanning the NSW South Coast and Illawarra. Horizon Bank branch locations: Albion Park, Bega, Bermagui, Berry, Merimbula, Moruya, Nowra, Thirroul, Ulladulla & Wollongong.
