The economic environment in which next year’s federal election will be fought will be affected in large part by how the RBA responds to a worsening international situation.
While all of us — gallery hack, blogger and Twitterati alike — were engrossed in politics within the House of Representatives this week, events of greater significance for the electoral chances of the government were unfolding elsewhere.
Economic events here and offshore flagged that a resilient Australian economy now faces a more difficult international environment between now and the end of next year than previously forecast, with significant consequences both out in the real world and in Canberra, where an election, if held on schedule, awaits.
First on the resilience: yesterday’s jobs figures reflect exactly how the Reserve Bank described the employment market — there’s been “moderate employment growth” but “the labour market has generally softened somewhat”. The September data showed the economy had put on 14,000 full-time jobs, seasonally adjusted, there was a welcome lift in participation, and a lift in hours worked.
The big problem, however, was Queensland. Since Campbell Newman was elected, Queensland’s unemployment rate has gone from 5.2% to 6.3%. Queensland has lost 23,000 jobs while the country as a whole has put on 16,000. Worse, the jump in Queensland unemployment was on the back of a big fall in participation in September.
Joe Hockey got himself into terrible difficulty trying to explain all that yesterday when he emerged to claim the figures showed “people are starting to feel the pinch of the carbon tax”. Quizzed on Queensland, he insisted the numbers were a lag indicator from Labor’s time in office. “The reality is there are a lot of factors that go into play,” he subsequently admitted. Amongst those factors was “they are feeling the pinch with some of the commodity prices coming off”.
Normally, the topic of recent falls in commodity prices has been entirely absent from the Opposition’s story on the economy, which has emphasised that it’s the carbon price and mining tax that are together entirely responsible for the looming peak in mining investment. Of course, Queensland is tricky territory on that issue since Newman upped mining royalties himself and delivered a Labor-like serve to mining executives. Newman may yet prove to be of substantial assistance to federal Labor in the run-up to next year’s election.
It was that peak in mining investment that encouraged the RBA last week to cut interest rates and indicate further cuts to come, in the light of a weakening international situation that meant lower economic growth globally next year than forecast.
The International Monetary Fund promptly confirmed the RBA’s concerns this week by yet again — how many times in a row is that now? – downgrading its growth forecasts. It also completed the step-by-step change in its thinking on austerity that has been underway for months, and admitted what most Europeans, and particularly the millions without jobs, could have told them — slashing government spending in the name of reining in debt dramatically slows economic growth, making the task you’re trying to achieve more difficult and inflicting serious economic and social damage along the way.
Things got even worse on the EZ front yesterday with Standard and Poor’s downgrading Spain’s credit rating — to “one notch above junk” as every report insisted on noting. As one of the Eurosceptic Daily Telegraph’s commentators spotted, however, S&P had also expressed real concerns about whether the much-heralded June commitment to recapitalise Spanish banks was worth anything.
Meantime there’s growing concern in Germany –- heartland of the axis of austerity — that it too may succumb to the recession its approach has inflicted on others. Although, of course, the Germans are so obsessed about inflation that they can worry about that at the same time as watching nervously for recession.
At this point, only the improving jobs market in the US is a cause for optimism for international growth, but the fiscal cliff threat continues to lurk as a cloud over 2013.
The Reserve Bank has to handle all this itself. The government has made clear it is determined to pursue, and most likely accelerate, its contractionary fiscal policy. Fiscal debate has entered a twilight zone in Australia in which the government is attacked for spending too much, courtesy of its long-term commitments to new spending initiatives like the NDIS and Gonski, when it is politically locked into a severely contractionary fiscal commitment in spite of a slightly-below-trend economic growth trajectory.
It’s all summed up in the bizarre fantasies of David Murray, a man who refuses to believe in climate change but who is convinced Australia is on the verge of going the way of Greece or Spain, and has multiple national platforms — the two national newspapers and the ABC — to spruik his eccentric views.
The immediate challenge for the government is MYEFO. But the problem there is the first two letters of the acronym. It is committed to a surplus this year, and we’re already nearly at the mid-year point. Options for increasing revenue this year are slim to none; changes to superannuation concessions, for example, won’t kick in until 2013-14. The best options for saving the surplus in the face of weaker revenue are delaying or cancelling spending: departments will be asked to identify programs tracking below forecast, or suffering significant delays, with spending either returned to the budget or pushed past July next year.
The net result is that the economic environment in which the election will occur next year — and how realistic both sides’ fiscal policies will be judged — is now even more in the hands of the Reserve Bank and its judgment about how best to time stimulus in conditions of global uncertainty and sluggish growth and a government committed to taking a great whack of spending out of the economy.