Can Australia Achieve Philip Lowe’s Economic ‘Nirvana’?


What does an ideal Australian economy mean for you and your family?

For many Australians, affordable housing, a well-paying job, stable prices and enough money to save for a comfortable retirement are high on the list.

But beach vacations and recreation can also be taken into account.

I’m asking you to think about this because Australia‘s top economist gave a remarkable insight into the Ideal Economy in a question-and-answer session earlier this month.

Reserve Bank Governor Philip Lowe had just finished a broad speech on the Australian economy in rural New South Wales when the topic of economic success in Australia came up.

“Let me describe my central bank nirvana to you,” Dr Lowe began.

“It is an inflation rate which is on average 2.5%, labor productivity growth at 1.5%… wages increase by 4%. [annually] and full employment, ”he said.

“This is where I would like to see us come.

Dr Lowe’s response was remarkable not because these are controversial measures of economic success – in fact, quite the opposite – but because Australia has not achieved them for many decades, or perhaps. ever be.

Core annual inflation has averaged less than 2% over the past decade (below the RBA target), wage growth is 2.2% per year, and labor productivity n ‘grew by only 1.1% in 2020-2021.

And the job market, even if it is improving, continues to welcome an estimate 637,000 unemployed people – obviously very far from full employment.

Overcome the “dog days”

You might be thinking, “Of course the economy is in a rough state, we’ve just been through more than two years of battling COVID-19, haven’t we? “

Well, the truth is, most of this economic malaise happened before COVID-19.

In the years before and after the mining investment boom, Australia’s economy was plagued by weak growth, stagnant living standards, and an inability to provide well-paid and secure work to anyone who wanted them.

Seasoned Australian economist Ross Garnaut called them the “ dog days ”.

And we are not the only ones doing our best.

Other economies like the United States, the United Kingdom and much of Europe suffered a similar fate.

The question now facing economists like Dr Lowe is whether the disruption caused by the pandemic and the associated political support from the federal government and the RBA during this time will be enough to shake off this malaise and position Australia for a new economic boom.

In other words, will Australia rebuild better in 2022, or will it fall back into the same stagnation that deceived two generations of workers?

Although he knows where the goalposts are, even Dr Lowe is not sure.

“I don’t know if we can make it happen,” Dr. Lowe said in the Q&A.

“But stronger wage growth than we’ve seen over the past decade is in the national interest, supported by productivity growth.”

What Dr Lowe is saying here is that attempting to achieve this nirvana is in itself beneficial for Australia. There is no harm in trying.

2022: The year of full employment?

Stripped of their building blocks, economies are billions of interwoven behaviors and decisions.

There are far too many factors at play in Australia’s attempt at economic nirvana to detail them here, so today we’re going to focus on just a few big ones.

Dr Lowe mentioned them before: Jobs, labor productivity and wages.

In other words, how much work is there, what does this work produce and who benefits from this work?

These three factors underpin the conditions for the economic empowerment of every Australian worker.

Let’s start with jobs – the job market is the foundation of our economy.

The goal here is to generate enough work that bosses across Australia will struggle to get more labor, forcing the price (wages) up.

Since World War II, this condition has been called full employment.

The problem is, no one really knows what full employment looks like.

Sounds simple, you just have to bring unemployment down until wages go up, right?

Sure, but the unemployment rate is now 4.6 percent, the lowest in more than a decade, and we still don’t see many signs of higher wage growth at the level of the l whole economy.

Economists, including Dr Lowe, believe we will have to push the unemployment rate to new lows – perhaps even below 4% – to really raise wages due to structural changes like precarious and flexible work.

The good news is that 2022 could be the year Australia hits that target.

“We know the competition for talent is fierce right now – companies are struggling to find suitable candidates for certain positions,” said APAC Indeed economist Callam Pickering.

“All of this would indicate that wage pressures will increase next year.”

Both major political parties have adopted economic strategies designed to push unemployment to record highs and an estimated $ 300 billion in government spending was pumped into the economy during COVID-19.

Much of that money has flowed into household balance sheets, and it is hoped that a resulting spending boom next year will increase demand and put businesses in a position to hire more workers than ever before.

“We have conditions in the economy that should facilitate higher wages,” Mr. Pickering said.

But it is not that simple.

The latest Treasury forecast projects Australia’s unemployment rate to fall to just 4.5% in July and 4.25% in July 2023.

The RBA is slightly more bullish, forecasting a rate of 4.25% by December 2022.

In either case, the jury is still out on whether full employment will be reached next year, even after the post-COVID employment rebound.

Slow and steady? Wage growth

If Australia achieves full employment, or just gets closer to it than it is today, economists like Dr Lowe expect employers across the economy to grow. wages faster.

The goal here is an increase in wages high enough to increase the demand for goods and services, resulting in higher inflation and stronger growth.

It is the special sauce that helps to increase the standard of living over time.

But more than a decade has passed since this equation worked.

Annual wage growth has languished below 2 percent for years and only managed to reach 2.2 percent in the September quarter of this year.

There are many reasons for this, but many of them are deep structural issues that are difficult to resolve, as Dr Lowe has pointed out.

“There are certainly hot spots where wages are rising rapidly, but most workers are still receiving two pay increases,” he said earlier this month.

Higher rates of precarious work, globalization of the labor market and more persistent competitive pressures facing businesses are just a few of the factors that have held back wage growth over the past decade.

The question is whether COVID measures such as closing borders and increasing consumer spending thanks to the government’s stimulus measures will be enough to get rid of this malaise and boost wages.

The RBA expects wage growth to reach 2.5% by 2023, while the Treasury forecasts a rate of 2.75% by July 2022.

If the predictions are correct, it will not be enough to achieve the lofty goals Dr. Lowe has set for himself.

Australia’s productivity problem

Although the unemployment rate is key to boosting wages, the underlying factor responsible for long-term wage growth and growth in living standards in Australia is productivity growth.

Labor works capital to produce income, which is then divided between the income of capital investors (often dividends) and the income of workers (wages).

When labor produces more capital income over time, it means that labor productivity has increased. Ideally, this should stimulate wage growth.

The problem is, Australia has a huge productivity problem.

The latest ABS data shows that labor productivity only increased by 1.1% in 2020-2021.

This is roughly where productivity growth has stagnated for a decade.

In the post-mining boom economy, Australia has suffered from low business investment, which means bosses are not doing enough to improve their capital (e.g., equipment and technology) to enable workers to produce. more income over time.

And on the other hand, workers have also struggled to upgrade their skills through education and training.

This makes it harder to find new ways to innovate and change processes to generate more income.

“When I entered the workforce it was pretty tight and companies spent a lot of resources attracting and retaining people,” Dr Lowe said Thursday.

“It drives productivity growth… I’ve talked a lot about the importance of reinvesting in training and skills. I think it’s a job for business and government to support that.

On the business side of this equation, there are at least some positive signs.

Business investment is on the rise, growing 12.9% per year in the September quarter, as bosses prepare to profit from the COVID rebound.

This should help support higher productivity growth over the medium term, if this trend continues.

But on the government side, there are few signs that either major party has concrete policies to reform the economy and boost productivity.

Economist Saul Eslake is not optimistic either.

“There is no reason to believe that we are going to see an acceleration in productivity growth beyond what we had before COVID,” he said.

Mr Eslake said the digitization of businesses during COVID could be an exception to this.

“Other than that, I find it hard to see anything that leads me to believe that productivity growth is going to be faster… I don’t see governments doing anything. “

Everything points to a year of potential but a lot of uncertainty for Australian workers.

What destination now?

There are genuinely positive signs that the rebound in COVID-19 will lay the groundwork for higher living standards over the next decade.

But things could just as easily turn the other way, and after a big bounce back to the “heatwave” of the past decades.

Obviously concerned about what could happen, the RBA is determined to keep the official interest rate at an all time high until hard data shows the unease subsides.

In that same Q&A, Dr Lowe reiterated that wage growth and inflation will need to be kept within the RBA’s target ranges for rates to rise, which is not expected to happen next year.

But 2022 will be an important step on the road to try to get there.


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