Remember the old days of the “two-speed economy”? Julia Gillard was prime minister, Wayne Swan was treasurer, and Western Australia (especially) and Queensland were blasting along with the greatest mining investment boom ever seen in Australia, while the rest of us struggled with a dollar above parity and a vast suction effect as workers were pulled into mining construction and services. Well, that was the narrative at the time, and it was a little true.
Now we have a real two-speed economy. We’ve had it for some time, but yesterday’s national accounts confirm it. The split is not geographical; it’s between households and corporations. Profits are strong, export revenue is strong, non-mining investment is growing and the end of the decline of mining investment is in sight. In the March quarter, business even enjoyed a turnaround from the recent (small) decline in labour productivity. It’s silly to describe Australia as has “defying world trends” as one commentator did, given in April the IMF declared the world was enjoying a “broader” and “stronger” “global economic upswing” and global growth was forecast at 3.9% this year. But there’s no doubting the strength of the result of 1% quarterly growth, fueled by a 3.3% rise in the terms of trade (the strongest for a year), a 1.9% rise in real net national disposable income and a year-high in company profits.
But households are going nowhere. Some commentators described a 0.3% rise in household consumption as “a modest” gain, which “also brightened the outlook”. Seriously? That measly 0.3% was sharply lower than the 1.0% rise in the December quarter, and the annual rate of 2.9% for the March quarter was unchanged from December. There were also some attempts to conjure yet another “wage rises around the corner” line from the data. But don’t be fooled — the “Compensation Of Employees” (COE) figure in the national accounts can be misleading. COE rose 0.8% in the quarter and 5.1% in the year to March. Sounds great, huh? But it measures total compensation for people employed in all sectors — the 5.1% growth reflects strong jobs growth, not strong wages growth.
The real story is what is called AENA (or Average Earnings from the National Accounts). According to the ABS, AENA grew 1.6% in the four quarters to March. Remember, the wage price index series recently showed 2.1% growth in the year to March. That means the broader AENA measure picked up industries where wages fell in the quarter and the year. Given real net national disposable income was up 2.5% in the year to March, that shows workers are missing out.
This is why household spending is so tepid — and why even to prop up that low level of spending, families have been increasingly dipping into savings. “The weakness in consumers is well known,” the AMP’s Shane Oliver wrote about the data. “Real wages growth is running flat, the savings ratio is now very low at just 2.1% and debt levels are very high. It is difficult to see households gaining confidence to run down their savings rate further in the current environment of low wages growth, slowing wealth accumulation (as home price growth weakens) and high debt levels.”
The NAB agreed. “While the quarterly outcome was weaker than we expected, it is more in line with our assessment of the underlying rate of growth in household spending. The significant headwinds faced by the household sector — weak wage growth, cooling house prices and high debt levels — continue, and are likely to weigh on consumption in 2018.”
This is the flip side of what is a Goldilocks economy for business, which is enjoying high profits, zero wage growth, low interest rates and rising terms of trade: their primary customers, Australian workers, can’t spend what they don’t have and what businesses refuse to give them — decent wage rises.
That’s not the only reason coming quarters will likely see a fall in growth. When the next (June quarter) set of national accounts are released in early September, the strong 1.0% growth rate (revised up from 0.8% originally reported) in the March 2017 quarter will drop out of the annual result. Without back to back 1% growth quarterly rises in GDP — and we haven’t had one of those since the Gillard-Swan years — annual growth will fall back again.
Either way, households will likely continue to miss out in an economy that is great for corporations and shareholders.
If workers are missing out then the small business sector is also missing out – which is responsible for 90% of Australia’s workforce [as we are regularly reminded] – So only 10% of business is growing strongly. So to re-phrase “Australian workers, can’t spend what they don’t have and what businesses refuse to give them — decent wage rises” Should read – Most Australian businesses cannot give – decent wage rises from money they do not earn -. For instance Retail cannot survive if consumers have no money, yet retail rents are increasing at boom time increments.Some Governments have their commercial arm raising rents at 5% per year that is 25% increase over 5 year lease. So in fact some State Governments are instrumental in ruining business . Solomon Lew also keeps stating that rentals are not sustainable- but large corporations are more flexible – they merely close their outlet in the Centre – or negotiate a lower rent. It is government Charges & pseudo government charges [utilities] that is leeching the commercial activity in Australia.
So we do not have a two speed economy we have a slowly shrinking economy with 90% going backwards and 10% booming.
Yeah, sort of, but no. There seems to be an assumption there that all small businesses are not growing, and I couldn’t find anything in this article to suggest that, Desmond. I suspect anecdotal evidence and supposition carried the day there. Besides, record keeping for small business is usually unreliable at best, and profits diverted and/or hidden easiest. It’s not a sector that can be reliably discussed in terms of how they’re going. Like farmers, it’s always a drought.
Your comments on rents are correct, but the pressure is all down. Your reference to commercial arms of government raising rents as somehow being a cause of rent increases denies the fact that most governments own less space than they occupy, and in any case make up such a tiny percentage of the overall commercial property market.
Re utilities, well yes, this is what happens when governments follow commercial and economic fads of neoliberalism, the essence of which could be said to sell your house and pay rent for the rest of your life, because that’s such a good idea (plus the kids won’t have any inheritance). Blaming govt and pseudo govt charges for the plight of small business, assuming they are in a plight, is a long, long bow. But good luck to you Desmond.
Record keeping in small business is as accurate as large business -to the extent that they do not have the luxury of creative accounting of corporations. Secondly government instrumentalities ‘do not make up a tiny percentage of commercial property market ‘, they make up a fair slab of the commercial property market e.g. for instance just one government instrumentality the QIC [Queensland Government] is a major player in commercial property,and a major retail landlord. So the original statement stands – they are also immune from court processes as the Law establishing QIC, I am told, excludes Judicial Review of its actions.
This government is not leading the economic growth, its being dragged along by it without a clue or care on how it needs to be shared equally to create a prosperous and fair society for all, and not just the greedy few, trickle down economics is a failed science prosecuted by failed economists and their conservative political hangers on, this government introduces policy on the basis of what they get out of it both in and out of their political careers, in other words, political and economic corruption is what is controlling policy in this government.
I’ve said it before and I’ll say it again. The answer to dead cat wage bounce is simple :- see all these jobs this government has created (according to press releases?)? All we have to do is get a couple or three of them, to enjoy the standard of living we could on one – including buying a home?
Trouble is we won’t have time to enjoy it – but that’s a problem for someone else to solve ….. Michaelia, you’re pretty innovative?
Well reasoned Glenn and Bernard, and the figures have been going this way for a while so it isn’t new, just reinforces the argument.
It provides another lesson in why national GDP figures should either not even be collected, or better still, collected but not published. If there is going to be any figure published, they have to be GDP per capita, which with a rapidly growing population has to show almost no growth. Further, if all the growth is just from additional people coming here, then all we are recording is population growth. BK and Glenn have argued this elsewhere, as have very few other esteemed journalists from the MSM (Peter Martin and Ross Gittins, mostly). 1 million new jobs is great, 1 million new people or more means we have gone backwards, or stood still at best. The lack of wage rises is not disconnected.
These GDP growth figures then are largely illusory. Productivity statistics are so rubbery as to the give the term ‘productivity’ meanings that nobody understands, and the word ‘statistics’ has never been more abused.
My point, as an analyst, is that shite statistics can do more damage than good. The fact that these statistics are then given substance by money markets and public policy which follows brain-dead ‘last-war’ theories on how economies work, means that something that is rubbery as all get-out is given some illusory substance it doesn’t have, provides solace where there should be none, and allows a bereft government to claim ‘growth’ as some sort of salve to their egregious performance.
It’s a shadow of a facsimile of a simulacrum, and all our business pages and news lap them up as though they mean something.
The ABS is full of classic statisticians, people who are great with numbers and terrible at understanding meaning. Politicians are full of knaves and fools who either believe the guff, or are just smart enough to know it’s bull and will use it to whatever advantage they can.
And still, the edifice crumbles.
Good points Dog’s Breakfast
Thanks GD and BK for, like other articles I’ve read, describing the state of the nation. Very few articles however point to a way forward out of this mire. Certainly the politicians, while full of bluff, bluster and promises, seem to have no idea at all, aside from business tax cuts. And we know they won’t work.