The Australian economy is not “strong”: it is facing its worst growth since the global financial crisis, and it’s down to the government’s deliberate policy of wage stagnation.
That’s the clear inference from the Reserve Bank’s May Statement of Monetary Policy, released on Friday after the Bank — out of what one now must assume was a fear of political criticism — held off cutting interest rates but flagged that unless unemployment fell, it would ease monetary policy.
Despite constant deficit spending to stimulate the economy, and multi-year record low interest rates, the Coalition goes to next week’s election with the Reserve Bank forecasting year-on-year economic growth in the 2018-19 financial year of just 1.7%, the lowest since 2008-09 when GDP rose 1.4% in the depths of the financial crisis. That’s down from 2.5% predicted by the bank in February. Point eight of a percentage point of growth lost in just 90 days.
The reason is plain: the slowdown in household income growth. The RBA forecast household consumption to grow at 2.2% for 2018-19 back in February. That’s now down to 1.6%; the 2.5% forecast for this calendar year is now 2%. Real household disposable income has also been revised down 0.5 points to 1.2%. Even the bank’s Wage Price Index forecasts, already well below those in the government’s budget a month ago, have come down a tad — workers can’t expect growth of over 2.5% until 2021.
And these forecasts assume interest rates fall significantly: the RBA has sent the strongest signal in years that a rate cut is in the offing. The post-meeting statement from last week’s RBA board meeting made it clear what the Reserve Bank’s policy priority is: “the Board will be paying close attention to developments in the labour market at its upcoming meetings”. The SMP went further and said the economic forecasts were based on financial market expectations for two rate cuts this year.
The domestic forecasts are conditioned on the technical assumption that the cash rate moves in line with market pricing, which implies two 25 basis point cuts to the cash rate. The exchange rate is assumed to be around 2% below where it was at the time of the February Statement. The oil price is assumed to remain 8% higher than at the time of the February Statement. The working-age population is assumed to grow by 1.7% per annum over the forecast period, which is a little stronger than previously assumed.
The jobs data on Thursday will thus need to show substantial growth to head off a rate cut. Watch for annual jobs growth above 2%, which is the average over the past 20 or so years — it is currently running at 2.4%, which is the RBA forecast for 2018-19. March quarter wages data will also be released on Wednesday; wage growth is expected to have stagnated at 2.3% annual growth in the three months to March. And despite its Pollyanna-ish view that wages growth will gradually return, it acknowledges that what little growth there is is in the sector where governments are pumping money in.
Wages growth is higher than it was a year ago in most industries. It remains highest in the healthcare & social assistance industry and relatively low in the mining and retail trade industries. The small pick-up in wages growth since 2016 is consistent with the gradual tightening of the labour market over that period. Real wages growth increased a little over 2018, but remains well below average.
In fact one of the few measures to be revised upward in the SMP was public demand: the RBA is now forecasting public demand to increase by 5.9% this year, compared to 4.1% back in February. This is even higher than the budget, which contained a slew of pre-election spending measures. At the moment, pretty much the only thing the Australian economy has going for it outside of what foreigners are prepared to pay for our minerals is lots of government spending flowing into health and social care and pushing up wages in those sectors.
Funny, when Labor proposed to do that directly with childcare wages, Morrison and co called it communism.