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Wages non-growth and austerity potential traps for the economy

Weak wage growth and soft public demand could yet leave us stranded as we look for new sources of economic growth, Bernard Keane and Glenn Dyer write.

The Right needs to be careful what it wishes for on wages and the budget, because if its preferred scenarios of real wage cuts and an austerity budget come to pass, it’s unclear where the motive power for a return to trend economic growth is going to come from – and it’ll push the prospect of a return to surplus further away than ever.

The Reserve Bank’s Statement of Monetary Policy issued last week covers off both subjects and spells out some clear concerns.

As business leaders and Wall Street bank economists demand lower wages for Australians, the RBA unsubtly made the point that wages growth isn’t our problem. It mentioned “slow” wages growth not once or twice or a few times in last week’s statement, but more than 20 separate times, as if by constant repetition it was hoping to crack the carapace of ideology and self-interest of the “cut wages” crowd. The RBA said:

Weakness in the labour market has seen growth of wages slow further. Various measures of wage growth are now around the lowest they have been over the past decade or longer.”

Ouch. Bad news for all those business leaders pining for a return to WorkChoices. Indeed, the RBA noted that slow wage growth was currently more widespread than during the financial crisis. This limp wages environment has been driven (unsurprisingly) by a weak labour market. The RBA noted:

There has been little employment growth over the past year, the unemployment rate has edged higher and the participation rate has declined noticeably. Much of the weakness in employment has been accounted for by business services, which in part reflects the effects of the shift from the investment to the production phase of the resources boom.”

And while the bank believes things aren’t getting worse at the moment — indeed, the bank lifted forecasts for GDP growth and inflation, suggesting that many of the gloomy forecasts in the Mid Year Economic and Fiscal Outlook statement of December are out of date — it won’t really be until 2015 that we see a return to trend growth and an uptick in labour demand.

That forecast seems particularly to be the case given the federal government has made it clear that even if you’re a manufacturer struggling with the impact of the high dollar, you’ll get short shrift in Canberra unless you’ve already screwed down wages and conditions for workers as much as possible. Notice that Qantas is now coupling its pleas for government assistance with a new campaign to cut staff and slash its costs, as it told Coalition MPs yesterday — probably a better approach than talking to Treasurer Joe Hockey, the details of whose meetings seem to find their way into the media.

On top of this, the RBA has expressed guarded concern about the level of spending cuts expected in the next year from all levels of government, stating pointedly that “the fiscal consolidation foreshadowed by state and federal governments implies the weakest period of growth in public demand for at least 50 years”.

It’s entirely possible that Hockey is engaging in traditional expectations management regarding the budget, hyping the bloodbath to come in May to generate relief on budget night when the cuts turn out to be surgical rather than slashing and swingeing.  But the austeristas who want a rapid return to surplus ought to look at the example of Europe as to why cutting public demand when economies are soft doesn’t bring surpluses any closer, it merely shrinks the economy.

The timing would be unfortunate given the global economy is looking healthier than it has been for some time …”

That’s especially the case given Toyota’s closure announcement, on top of the General Motors decision and the signals sent by the government’s decision not to help SPC Ardmona. The Abbott government’s refusal to buckle to corporate blackmail by transnational companies or extend corporate welfare is a welcome change from previous governments of both persuasions. But the poor handling of the end of the car manufacturing industry will have an impact on consumer confidence, even if the direct employment impacts are several years off.

Unemployment is already the number one economic concern for Australians, and the looming end of car manufacturing won’t help that mindset at all. Big job cuts foreshadowed by Qantas and Telstra will add to the sense that job security is deteriorating. The 1300 sackings from Forge overnight won’t help.

Consumers traditionally react to unemployment concerns by curbing spending — except Australians have already been saving at historic levels since the financial crisis. Coupled with a particularly harsh budget, it could push the economy toward stall speed in the next 18 months, rather than the pick-up in growth that the RBA believes is ahead in 2014-15.

There’s also a worsening drought in eastern states. If that deepens and extends its grip across food-producing areas of the country, it could very well become a potent inflation issue later this year and into 2015.

The timing would be unfortunate given the global economy is looking healthier than it has been for some time — having weathered the extended slump caused by Europe and the US, we’d be falling over just when the external environment was looking much brighter.

There’s one more thing the RBA pointed out that’s significant in all this. The Prime Minister and other senior figures, including Malcolm Turnbull, have spoken blithely about jobs for unemployed car workers appearing in other sectors of the economy. That, traditionally, has been the (long-run) result in previous periods of restructuring. But the RBA noted that many of the most recent job losses were coming in the service sector — where employment growth had been its strongest in the past few years.

Over recent years there has been a pronounced increase in household services sector employment (which includes the health, education and hospitality industries), driven mainly by the health industry. More recently, growth in household services employment looks to have slowed. Construction employment appears to have trended a little higher over the past year or so, consistent with the pick-up in activity in the housing market”.

So if consumer sentiment does turn negative and public demand does take a big hit (bearing in mind health and education are strongly driven by government spending), we’ll basically be relying on housing construction to drive employment growth and to keep the federal budget from going further into the red.

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  • 1
    Electric Lardyland
    Posted Thursday, 13 February 2014 at 2:59 pm | Permalink

    Oh silly, ‘the return to trend economic growth’ is going to come from massively expanding our capacity to export coal to China, through projects like the ironically named Abbott Point; unfortunately the Chinese just happen to be massively investing in renewable energy, in order to slash its consumption of polluting, climate change inducing, bad for the balance sheet, coal.

  • 2
    CML
    Posted Thursday, 13 February 2014 at 3:39 pm | Permalink

    So, not only will we NOT be selling coal to China, but along the way the Great Barrier Reef will have incurred significant damage, as they allow their mates to pollute the Marine Park. All this in preparation for selling off said coal, which is not going to happen!
    What WILL happen, is the number of tourists who come to Oz to visit the Reef will be largely reduced, if all they are going to see is a dead reef. That will result in less tourism sector jobs, and the merry-go-round continues.
    That lot in Canberra really do not have a clue!!

  • 3
    Jimmyhaz
    Posted Thursday, 13 February 2014 at 4:52 pm | Permalink

    When will people realise that a budget surplus and a functioning economy are two mutually exclusive things in Australia? It’s mathematically impossible for Australia to push a trade deficit, as well as a surplus in both the public and private sectors. It would mean Australia’s balance of payments, something that must add up to zero by definition, not equal zero.

    Perhaps it’ll happen when unemployment hits 20%, government ‘debt’ is still growing, and real wages are so low that purchasing basic necessities is out of reach for a not insignificant portion of the population.

    I’m not holding my breath though.

  • 4
    Electric Lardyland
    Posted Thursday, 13 February 2014 at 5:10 pm | Permalink

    Yes, CML, Abbott Point is the sort of decision that a government would only make, if they didn’t actually “believe in the science of climate change”. It’s strange how the Coal-ition constantly claim that they do “believe in the science of climate change”, while their actions relentlessly suggest that they don’t.

  • 5
    Mark out West
    Posted Thursday, 13 February 2014 at 7:59 pm | Permalink

    It’s interesting to see that there is no commentary about the LNP (vic) taking a oppositional stance to LNP (Fed) over SPC. So the right don’t trust each other on managing the economy.

  • 6
    rogergen@tpg.com.au
    Posted Saturday, 15 February 2014 at 4:00 pm | Permalink

    One size doesn’t fit all; there are three quite different issues regarding employment – what is the trend, which components are most significant, and just how good are the jobs that appear?

    Since the election of the Howard government in 1996 to at least 2004, 35% of all net new jobs created were casual. Two thirds of the net increase in jobs between 2000 and 2003 paid less than $600 per week.

    Rather than employees having more choice, workers are struggling ever harder to balance their personal lives with the demands of their employers. Much of the growth in long hours of work and unpaid overtime is due to work intensification, caused by reduced staffing levels and increased employer demands.

    Many people who travel to Australia with a Working Holiday Visa intend not to take a holiday but to work full time. After their Working Holiday Visa ends, some apply to remain on standard Tourist visas, while they and overstayers will often work illegally. In this flattening labour market, the rapid increases in visa worker numbers is reducing opportunities for Australian jobseekers, particularly at the entry level of the labour market. Asylum-seeker numbers are simply irrelevant.

    Capitalism under the Laberals is thus expanding an underclass “of the excluded” not seen since the late 19th century - prime-aged men without full-time jobs, wives, or children. Both technology and deregulation have eliminated the youth-entry level jobs that once existed. A million temporary visa workers plus some 40% of workers now being casual means that we have a “crisis of insecure work”.

    But then, the class interests of the filthy rich are best served by casualisation and marginalisation. Consequent costs, losses, and low growth are simply offloaded onto the most vulnerable. Intervention can only make it better.

  • 7
    R. Ambrose Raven
    Posted Sunday, 16 February 2014 at 12:44 am | Permalink

    No, no, brutal Austerity is the whole idea. Abbott/Hockey’s Destruction of the Car Industry Plan is a deliberate and calculated act. Why is that behaviour so difficult to recognise when it is being practiced in Europe and the U.S. with religious zeal?

    In Europe and the U.S. the filthy rich – the 0.1% - have done very very well from brutal Austerity; to plunder similarly here, they need to inflict similar pain. Therefore, as representative of the filthy rich and of transnational capitalism Abbott’s agenda (equally driven by Hockey) is in fact quite open, quite simple, and quite brutal – to wreck the economy so as to indirectly force the massive cuts in wages and income transfers that that stratum has so far been unable to inflict directly.

    While doing obvious damage may take a long time, post-1980 deregulation has done much to render our economy and society more fragile and more stressed, notwithstanding its overall wealth.

    Wrecking CFEC and the car industry, Qantas and SPC, signing up to “free” trade “agreements” with Investor-dispute clauses, importing even more sweatshop coolie s457 visa workers, giving lots more public money to private schools and none to government schools, $7 billion on Direct Action as useful extra lead weight (which will - as intended - benefit polluters), and the RBA being given $8.8 billion that it didn’t want or need, are all breathtakingly brazen and naked wastes of money that nevertheless add substantially to the budget deficit. Crucially, they thus become an excuse for cuts of a similar magnitude to household-oriented Budget programmes.

    Thus Abbott and his henchman Hockey will ensure the necessarily large losses of jobs and opportunities to destroy our wages, our lifestyle, and our future. Note how “awards”, recently made a minimum safety net, have now been blessed by Abbott the Hun as the new industry standard.

    You want to see our future as the Noalition would have it? Look to the fate of the ordinary people of Spain, Europe, the U.S. or Britain. It is after all the fate of the ordinary people; the filthy rich are doing very nicely thank you very much.

  • 8
    Karen
    Posted Monday, 17 February 2014 at 9:39 am | Permalink

    The Right needs to be careful what it wishes for on wages and the budget”

    The Right’s agenda has always been to build and concentrate resources into the hands of the uberwealthy - everything else is at best a secondary consideration. Indeed, the 85 people and their families who own half the global income would view these issues as irrelevant considerations. The social and economic dislocation caused by the GFC and their public policy push for government bailouts has allowed them to ‘clean up’.

  • 9
    Karen
    Posted Monday, 17 February 2014 at 9:44 am | Permalink

    To clarify, contracting economies, public sector contraction, rises in unemployment, stagnant incomes has actually played into the hands of the wealthy who have profited immensely from this GFC sequelae. So, they don’t have to be careful about what they wish for.

  • 10
    Peterpan
    Posted Monday, 17 February 2014 at 5:58 pm | Permalink

    No problem. Let’s see who is the first to offer to work for lower wages. How about the 36 million dollar overseas banking quartet who rip off the Australian people with their unfair conditions. Too easy . Hey there is only four of them . Start a movement right now. When you are successful then move on to poorly paid union backed employees. Just change four people first.

  • 11
    Peterpan
    Posted Monday, 17 February 2014 at 6:43 pm | Permalink

    Joe Hockey should explain his plans to reduce SIGNIFICANTLY the pay for the four overseas banking quartet who rip $36m from Australians. Only four people, Joe. Lead from the top.
    Is not $1mm enough for each of these overseas interlopers. How much would they be paid in N.Z. Scotland. Ireland or South Africa? Not a smidgen of what they rip

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