The pile of economic data we’ve had over the last fortnight, and some observations from Treasurer Joe Hockey about it, gives us an opportunity to assess how the government’s economic strategy is comparing to reality.
"Government spending needs to be directed to the highest-priority areas, particularly to high-quality infrastructure that will support private sector growth," Hockey said in response to this week's GDP figures. "Along with a focus on practical reforms to boost participation and productivity, these measures will build a basis for sustainable growth into the future."
Hockey has also had to speak more directly about job creation of late, given the series of high-profile job cut announcements, even though unemployment remains consistent with forecasts (Hockey has correctly noted the shock-horror nature of Labor’s reaction to the rise in unemployment, as if Labor’s own forecasts while in government didn’t predict it).
There’s little that’s new about any of this: all governments favour deregulation, higher productivity and growth. The special twist is the Coalition’s growing attack on penalty rates (as distinct from normal wages, which it says it doesn’t want to cut, as if a worker is magically less out of pocket from a penalty rate cut a wage cut), but that's WorkChoices revisited anyway.
But the December quarter economic data has driven huge holes through the Coalition’s arguments. As we pointed out on Wednesday
, labour productivity improved yet again in the December quarter and in 2013 grew by 1.8% in the market sector. Real unit labour costs, which show the average cost of labour per unit of output, also fell in the quarter and across the year by 1.7%.
And if you add in 2012 data, labour productivity has recorded its fastest two years of growth since 2001-2002: GDP per hour worked averaged 2.5%; gross value added per hour worked -- basically, private sector labour productivity -- averaged 2% a year. And the 1.7% fall in real unit labour costs over 2013 more than reversed the 1.3% rise in 2012. And remember that we learnt in February that the wage price index had recorded its lowest annual growth since the Australian Bureau of Statistics began covering it in 1997.
And yet still the Coalition, its media cheerleaders and business insist we need IR deregulation to boost productivity and reduce wage costs.
The national accounts also showed 1.6% growth in nominal GDP in the December quarter, or 4.8% through the year. That was much stronger than the forecast -- and indicated that domestic activities grew quickly even though the terms of trade fell 1.2% over the year.
But Treasury and Hockey cut the nominal growth forecast to 3.5% for this financial year from 3.75% in the December Mid Year Economic and Fiscal Outlook (and cut future years as well). We have maintained ever since that this was a deliberate ploy by Hockey, along with his $9 billion Reserve Bank handout
, to make the fiscal situation he inherited from Labor look considerably worse than it is and his own efforts to cut future deficits better than they really will be. We’ve seen no evidence since to contradict this, especially not after Wednesday’s data.
And that’s coincided with a reporting season showing strong profit and dividend growth by business, which will flow directly into Hockey’s revenue. When questioned about this bounty this week, Hockey claimed it wouldn’t help because the corporate sector still has accumulated tax losses. It’s an old story -- former treasurer Wayne Swan used that line after the financial crisis and was correct to do so given the carnage the GFC had inflicted on balance sheets. But in 2014? Particularly when last week Finance Minister Mathias Cormann released the December monthly financial statements
showing that, for the first time under this government, year-to-date revenue had come in ahead of forecast. The usual caveats apply -- a half year doesn’t tell the full story -- but the government’s claims about the mess it inherited from Labor look weaker and weaker.
"The big unknown, however, is what the Aussie dollar does if the current flow of good data continues ..."
Moreover, the strong rise in retail sales we saw this week will deliver more GST revenue to state governments, as will the rising pace of activity in the property market.
The only things against this rosy outlook are the current weakness in iron ore prices -- $US116 a tonne at the moment instead of more than $US134 at times in 2013, and the current business preference to reward shareholders rather than churn profits back into future investment.
On participation, Hockey’s ambitions are laudable but unlikely. Even just reversing the decline in participation that happened under Labor looks to be a very tough challenge. Hockey should heed the forecast of one of the smartest people in his department -- David Gruen, Treasury's chief macroeconomist. In a little-noticed speech
made last Friday he had these comments about participation:
"... what I see as the overly optimistic projection for the labour force participation rate … In my view, then, the 15+ participation rate probably already reached its peak in late 2010 at just below 66% and is unlikely to return to those levels over the next couple of decades."
The big unknown, however, is what the Aussie dollar does if the current flow of good data continues, and the likely impact on the RBA’s monetary policy stance -- there’ll be a lot more “rate rise looms” commentary if the current tone of economic data is maintained. The dollar was back above 91 US cents this morning. Hockey will be hoping a strong dollar isn't the bane of his Treasurership like it was for Swan.
RBA governor Glenn Stevens in his opening remarks
at this morning's Economics Committee hearing cast the overall economic narrative in positive terms -- but emphasised that monetary policy can't do much more to help in the transition from mining investment boom to a more traditional Australian economic growth pattern:
"Of course, the outlook contains many uncertainties, not least the ‘handover’ from mining investment spending to sources of demand outside mining. In some important respects, the basis for such a handover is coming into place, as I have just described. The question then is: will the additional demand likely to be generated outside mining as a result of these trends be just the right amount to offset the large decline in mining investment spending, so keeping the economy near full employment?
"... it could not be assumed that a shortfall in demand could necessarily be made good in short order by monetary policy. Monetary policy can have a powerful effect on the general environment, but it cannot hope to fine-tune the quarterly or even annual path of aggregate demand. At the present time we judge monetary policy to be doing the things it can reasonably be expected to do in the circumstances we face."
That means fiscal policy, which is in Hockey's hands, may yet have to play a role.