This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/is-the-aussie-economy-in-trouble-022757219.html
Is the Aussie economy in trouble?
It has not been a good week for data on the labour market.
Since the election in July 2016, employment has fallen by 25,600 people despite the working age population increasing by more than 70,000; the workforce participation rate has dropped by an alarming 0.5 percentage points; and annual wages growth has plummeted to just 1.9 per cent, a level not seen in many decades – possibly even half a century.
In trend terms, full-time employment has been falling to 10 straight months which means that the take home pay for many of those with a job is being undermined as workers work fewer hours, on average, than they would like. This crimps consumer spending and so the cycle of weak growth in consumer spending and employment continues.
You don’t have to be an economist to realise these are not good indictors.
These are usually the dynamics of a labour market when an economy is performing well below its potential. While economic optimists might point to the latest GDP growth rate of 3.3 per cent in the year to the June quarter as a sign things are not as bad as the labour force data imply, this ‘good’ GDP result was significantly underpinned by export tonnages of iron ore and coal while other parts of the economy were either weak or going backwards.
This is important to note because the mining export sector employs a tiny number of people relative to the labour intensive part of the economy that are struggling to keep their heads above water.
In other disconcerting news, the relatively new Governor of the Reserve Bank, Phil Lowe, gave a speech where expressed a clear view that interest rates should remain at current levels – ie, not cut. This is disconcerting not only because the labour market is weak, but last month’s consumer price index showed underlying inflation falling to the lowest level recorded.
For the RBA, which targets inflation well above the current level, there appears to be a pig-headedness in an assumption that things are about to turn up even though the run of news is skewed towards softness. Australia’s interest rates remain among the highest in the industrialised world for reasons that are linked to the RBA’s rose coloured view of the economy.
It begs the counter-factual question. If the RBA were to cut interest rates tomorrow – or at its next Board meeting in December – what would the risk be that such a move would underpin a wages breakout? A shortage of workers in the economy? A troublesome rise in inflation?
The answer to all of these questions is “none”.
There would be no risk that such low interest rates would lead to an overheated economy. Even a 50 basis point interest rate cut to 1.0 per cent would not pose a threat but it might lead to a softer Australian dollar which would boost exports, free up cash flow for indebted consumers and businesses alike and it might be the spark to see stronger economic growth as investment was encouraged.
The Australian economy remains in reasonable shape, but there are risks emerging which should see the RBA cut interest rates again.