Handily, and quite accidentally, Reserve Bank Deputy Governor Guy Debelle has provided us with an independent assessment of the economy and its key challenge as we head into the election. That key challenge? Falling household income and the way it has dragged down household consumption and economic growth at a time when the wider economy is doing well with record exports, jobs growth, business investment and rising tax revenues.
In a major speech on the economy yesterday, Debelle explained the different “lenses” through which the economy can currently be observed, and how fundamentally they differ. GDP growth at the end of 2018, he noted, was poor, and “the primary reason for this has been that consumption growth has been markedly slower than we had forecast”.
But employment continued to be strong, and its strength couldn’t be explained as a “lagging indicator” given its strength is continuing. Two key “lenses” thus showed a “stark contrast”. A third “lens”, business investment, reflected a path between those two extremes, round about long-term trend growth. “Business investment, outside the mining sector, has been growing at a good rate. Some part of this is related to the infrastructure spending occurring right round the country, but far from all of it,” Debelle noted. “There has been strong growth in investment in machinery & equipment and software.”
So, Debelle asks, why did consumption growth slow so markedly in the second half of 2018? It’s not directly the decline in house prices, he says.
I am not so sure that is from the direct ‘wealth’ effect of lower housing prices as much as it is from the fact that turnover in the housing market is at very low levels, as is typically the case when housing prices have been falling. As people are moving house less, they are spending less on things like household furnishings.
Moreover, he notes, “one puzzle related to the possible wealth effect is that the slowdown in household spending has been much more pronounced in New South Wales than it has been in Victoria, despite similar declines in housing prices. While population growth in Victoria is higher than in New South Wales, that doesn’t account for the whole difference.”
No, in Debelle’s view, “the main explanation as to why consumption growth has slowed is the low growth in household income, and an increasing expectation that it is likely to remain low”.
“Likely to remain low.” That’s a key phrase, both in terms of household spending decisions and in terms of policy. The RBA’s forecast for wages growth is 2.5% by June next year and just 2.6% in June 2021 — that is, wages growth will barely shift.
In contrast, the government predicted in last week’s budget that wages growth would accelerate over 3% in 2020-21 and then to 3.5% after that. This is a continuation of a policy of neglect and lies on wages growth by a government that has presided over — deliberately, Finance Minister Mathias Cormann says — a policy of wage stagnation for workers, one that has undermined economic growth.
Tax cuts — especially ones that deliver most of the benefit for people on middle incomes, like the ones the government unveiled last week — will do little to address sluggish household incomes. Bill Shorten claimed some weeks ago — to the rage of the conservative commentariat — that the election will be a referendum on wages. As far as the economy goes, if you’re not talking about wages and lifting growth, you’re missing the point.
“That key challenge? Falling household income and the way it has dragged down household consumption and economic growth at a time when the wider economy is doing well with record exports, jobs growth, business investment and rising tax revenues.”
No shock there.
I went over this in response to a Keane piece a few weeks ago and was apparently heard, judging from later pieces.
Most people have jobs. This isn’t a 20% unemployment economy. So the issue is lack of wages, rising prices, underemployment, lack of job security.
If the average working person is not doing well, then the economy is not doing well.
Not the environment?
There are a lot of flow on effects from low wages growth.
In health the population, tends to put off going to the doctor, some can’t afford the medicines and the old, poor and disadvantaged wait until they are very sick, then turn up in the emergency department needing a bed.
Has anyone crunched the cost/ benefit analysis of providing free antibiotics and other drugs, rather than a hospital bed at around $1,500 per day?
Relevant to this article is a piece that appeared in the Brisbane Courier Mail (‘Its a choice between jobs and strong economy or higher taxes’ Apr 12th p. 29) – a typical Murdock voice piece, whereby Morrison outlined ‘compelling’ reasons to vote for the Coalition rather than the ALP. To my surprise the word ‘economy’ appeared 13 times and Morrison made much about job creation but not a single word about stagnant wages, but then again Morrison and his mates have no personal experience of stagnant wages. So apparently it’s not a matter of concern than there are a sizable number of full-time workers who still live below the poverty level or the many part-time workers who crave full-time work. Australia proudly sits in the top five nations for the size of its part-time workforce. Other nations manage to avoid this situation so why is it not a priority of the Morrison government? Is this what Morrison means by a fair go for all those who have a go? And surprise, surprise not one word on climate change. I guess Morrison figures that is the children of the future’s concern. The climate change speech by a young 15- year old Swedish girl Greta Thunberg to a UN Climate change conference in Poland (2018) obviously fell on deaf ears are far as Morrison and his fellow knuckle-draggers on climate change are concerned and puts them to shame.