Something screwy is going on with our economy and I’m not sure if it’s a bad or good thing! This odd observation, which I’ve never made before in 33 years of publicly commenting on the Oz economy, comes as I prepare for the PwC post-Budget breakfast that I’ll be doing in Brisbane for the 12th year.
I know this about this breakfast because last week I heard the legend of the media and women’s stuff — Ita Buttrose— talk about the fact that her brother, Will, had died 12 years ago.
Will was one of Australia’s great investment bank economists, who was in the forefront of taking economic analysis to the media. He was an early rock star economist and became a friend in my early days of writing economics columns for The Australian newspaper, which I did for about 20 years.
When Will got sick, he asked me to fill in for him in Brisbane. Unfortunately he didn’t recover, so I think about him every year around this time. And I reckon he’d agree with me that the economy is really acting strangely.
For starters, the Reserve Bank is more optimistic on the economy than most economists, who usually don’t like to be out of step with the central bank’s expert economists.
Next, wages are finding it hard to rise, with the official wage price index for the December quarter coming in at 1.9%. It has been around that increase-rate since the middle of 2016! There could be some improvement, with The Australian reporting today that “the 1050 enterprise agreements registered in the December quarter had an average wage increase of 2.5 per cent a year,” and “this marked an improvement from the record low average rate wage rise of 2.2 per cent for agreements approved in the September quarter, but is still well down from the average 3 per cent increase in agreements settled a year earlier.”
The RBA is again optimistic, telling us that the number of firms offering increases greater than 3% has risen from 14% to 26% over the past year. The central bank thinks the worst for wages has passed but it’s really weird that wages have taken so long to start spiking.
Oh yeah, and home loan interest rates are below 4%. Now that’s something I haven’t seen in my lifetime, and the fact they could stay that way until the end of 2019 (that’s the call by a lot of economists) is really unexpected and screwy!
And on the subject of economic oddities, what about us breaking the world record of growing for nearly 27 years without a recession?! We even missed the GFC recession that all other Western economies endured. And our unemployment rate didn’t even go past the 6% level!
While on the jobless rate, this is a really strange one, with 417,000 jobs created in the year to January this year, with economic growth well under 3%. Over that time, unemployment has dropped from 5.8% to as low as 5.4% late last year.
Economics 101 always said that economic growth happened first and 3% growth was needed to drive the unemployment rate down. Also, the jobless rate was a lagged indicator, meaning it could be six to 12 months before the good job results showed up. But these 417, 000 jobs came despite sub 3% growth.
Sure, there have been big changes in our lives, and I think the GFC brought a lot of them, such as unbelievably low interest rates. It also spooked a lot of businesses for some time and consumers are not completely relaxed yet. Since September last year, the optimists now outnumber the pessimists. We had a near Great Depression experience and it was a mining boom and then a housing boom that kept us from going so negative that we could have seen a recession show up.
The world we live in has less powerful unions. Younger workers are not as pliable and many want to be self-employed or more casual in the way they work. They don’t want jobs for life and they’re challenging all the stable structures that defined economies of old. Many older Australians are going along for the ride.
We’re buying online and from overseas. We travel overseas a lot more and participate in the shared economy that drives down prices. But as I’ve always argued, these businesses will also drive down wage rise growth.
How can Gerry Harvey pay the usual wage rises when he now competes with Amazon and other online disruptors that compete on price? How do hotel operators pay their staff good pay rises when Airbnb is taking customers away, making it hard to raise the prices of a room?
I could go on and name more oddities of the modern Australian economy, which are also happening in the USA, the UK and Europe. Economists don’t call it a “screwy change”. They call it structural change of the economy. However, the fact a lot of it has been caused by what we call digital disruption, makes all this disruption to our normal experience with the economy even more understandable.
I don’t know how this will work out. I don’t know when wages will pick up significantly, when unemployment will fall under 5%, when interest rates will rise and when the next recession will come along. But I suspect we will have more of this, with gradual improvement for a couple more years.
It’s like the economic cycle has been stretched out such that the good times are coming slowly. It also might mean that the bad recession times are further away as well.
When the 1987 stock market crash happened, I interviewed the great economist, John K. Galbraith from his holiday home in Switzerland.
I asked what would the crash do to the economy? His answer was priceless! He said, “I don’t know but there are some poor fellows out there who don’t know they don’t know.”
As I say, I don’t know, but I’m betting things get better, slowly.
Come on TV with me…
If you’d like to be a part of an audience for a special recording in Sydney of my Sky Business TV show, Money Talks, where we give you a chance to ask questions, email Maureen@switzer.com.au In the subject heading put the words Money Talks. We will be filming on Thursday 17 May at 5.30pm. There are limited seats so if you want to attend then get in quick. Look forward to meeting you.
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