Handily, and quite accidentally, Reserve Bank Deputy Governor Guy Debelle has provided us with an independent assessment of the economy and its key challenge as we head into the election. That key challenge? Falling household income and the way it has dragged down household consumption and economic growth at a time when the wider economy is doing well with record exports, jobs growth, business investment and rising tax revenues.
In a major speech on the economy yesterday, Debelle explained the different “lenses” through which the economy can currently be observed, and how fundamentally they differ. GDP growth at the end of 2018, he noted, was poor, and “the primary reason for this has been that consumption growth has been markedly slower than we had forecast”.
But employment continued to be strong, and its strength couldn’t be explained as a “lagging indicator” given its strength is continuing. Two key “lenses” thus showed a “stark contrast”. A third “lens”, business investment, reflected a path between those two extremes, round about long-term trend growth. “Business investment, outside the mining sector, has been growing at a good rate. Some part of this is related to the infrastructure spending occurring right round the country, but far from all of it,” Debelle noted. “There has been strong growth in investment in machinery & equipment and software.”
So, Debelle asks, why did consumption growth slow so markedly in the second half of 2018? It’s not directly the decline in house prices, he says.
I am not so sure that is from the direct ‘wealth’ effect of lower housing prices as much as it is from the fact that turnover in the housing market is at very low levels, as is typically the case when housing prices have been falling. As people are moving house less, they are spending less on things like household furnishings.
Moreover, he notes, “one puzzle related to the possible wealth effect is that the slowdown in household spending has been much more pronounced in New South Wales than it has been in Victoria, despite similar declines in housing prices. While population growth in Victoria is higher than in New South Wales, that doesn’t account for the whole difference.”
No, in Debelle’s view, “the main explanation as to why consumption growth has slowed is the low growth in household income, and an increasing expectation that it is likely to remain low”.
“Likely to remain low.” That’s a key phrase, both in terms of household spending decisions and in terms of policy. The RBA’s forecast for wages growth is 2.5% by June next year and just 2.6% in June 2021 — that is, wages growth will barely shift.
In contrast, the government predicted in last week’s budget that wages growth would accelerate over 3% in 2020-21 and then to 3.5% after that. This is a continuation of a policy of neglect and lies on wages growth by a government that has presided over — deliberately, Finance Minister Mathias Cormann says — a policy of wage stagnation for workers, one that has undermined economic growth.
Tax cuts — especially ones that deliver most of the benefit for people on middle incomes, like the ones the government unveiled last week — will do little to address sluggish household incomes. Bill Shorten claimed some weeks ago — to the rage of the conservative commentariat — that the election will be a referendum on wages. As far as the economy goes, if you’re not talking about wages and lifting growth, you’re missing the point.