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.
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suggesting that many of the gloomy forecasts in the Mid Year Economic and Fiscal Outlook statement of December are out of date — it won’t really be until 2015 that we see a return to trend growth and an uptick in labour demand.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.