While the story of the Australian economy for much of 2015 has been of strong exports and a weak domestic sector, the year ends with that balance shifting. The jobs market has strengthened — to the extent that we can tell from the ABS’ data — retail sales remain solid, as well as car sales, while property prices have cooled, along with demand from investors, which is commonly agreed to be a good thing, while owner-occupiers are still ordering up new dwellings and buying new flats, particularly in Sydney, where a long-standing housing shortage is being addressed.
The major negatives remain the very weak demand for commodities and low prices, which are likely to go lower in the short term, aided and abetted by the strength of the US dollar — although that will be tested next Thursday, when the US Fed is widely expected to lift interest rates. So exports remain weak, although iron ore volumes are running at near record levels as Chinese buyers soak up high-grade ore priced at what are, by the levels of the last five years, bargain-basement prices. Thus the mining boom is dead and the investment boom it engendered is fading quickly, but there are growing signs of more investment emerging from the non-mining sector.
The Reserve Bank’s view of the economy, as expressed in the post-board meeting statement earlier this month when the bank left rates on hold was spot on:
“…moderate expansion in the economy continues in the face of a large decline in capital spending in the mining sector. While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions in non-mining sectors over the past year. This has been accompanied by stronger growth in employment and a steady rate of unemployment.”
If you’re in business, in fact, things are looking very good. Business conditions are above their long-term average according to this week’s monthly survey from NAB, and confidence levels among consumers and business are solid without going over the top. Real wage growth remains weak while market-sector labour productivity returned to strong growth in the September quarter after slower growth earlier in the year. Inflation, which has always crunched the economy at the end of previous booms, is not a problem anywhere, and interest rates remain at historic lows.
Despite such benign conditions, business remains mired in a state of suspended animation about investment, cash flows, borrowings and capital management to pay off restive shareholders. There have been a number of earnings downgrades from major companies like Dick Smith, Austral and Spotless, and uncertain outlooks issued at annual meetings. The economic data is saying one thing and the sharemarket another (especially given the predominance of big banks and resources companies in Australian equities markets). The negative influence from weak commodity prices, especially iron ore and oil and gas, is like a weighty blanket across investor sentiment.
That’s unlikely to be helped by Tuesday’s Mid Year Economic and Fiscal Outlook, to be released in Perth on Tuesday by Treasurer Scott Morrison and Finance Minister Mathias Cormann (it’s in Perth to accommodate the impending arrival of the Cormanns’ next child). There’ll be another of that now well-established bi-annual ritual, the revenue write-down, which will blow out the budget deficit yet again, especially given Tony Abbott and Joe Hockey failed to stick to their budget forecast of expenditure of 25.9% of GDP and instead, according to Morrison, were spending 26.2% of GDP. That is well above what Kevin Rudd and Wayne fired at the financial crisis in 2009, when they were turfed out. While it’s the politicians who have to face the media to explain why they’ll be receiving less revenue than forecast, the perpetrators of this ongoing fiscal error, Treasury, seems to get off scot-free, despite the damage such write-downs do to public and market confidence — and despite Hockey and Cormann promising that the days of optimistic Treasury revenue forecasts were over.
But despite all that, there’s one area where the economy has performed far better than expected, and it’s the most important. The biggest surprise of the year has been the resilience of the labour market — despite forecasts that unemployment would rise well above 6%, it’s now at 6% in trend terms and 5.8% in (the probably unreliable) seasonally adjusted terms. Moreover, the decline in the participation rate has halted and even started to reverse a little. As the RBA and the Productivity Commission have pointed out throughout the year, this is the result of a flexible industrial relations system that has enabled higher employment through lower wages growth — exactly what the IR deregulationists in the business community and the right-wing commentariat have always demanded.
Keeping more Australians in jobs despite the end of the mining boom and tepid economic growth is a great achievement and one we should be proud of. Julia Gillard, whose Fair Work Act has helped that achievement, might reflect that not everything positive she did while in politics has been swept away.