Caton's Corner - December 2013

The Australian share market fell by 1.9% in November, its first fall in five months. For the financial year to date, the market has still risen by 10.8%. For the calendar year to date it is up by 14.4%. The US share market rose by 2.8% in the month, bringing its year-to-date change to 26.6%. Taking into account the fall in the $A so far this year, Australians invested in the US share market have experienced a gain of more than 44% so far this year!


In the United States, the focus has shifted from fiscal policy back to monetary policy and the prospect of the beginning of tapering of quantitative easing. During the month, it became more likely that Janet Yellen will be appointed chair of the Fed to replace Ben Bernanke. This increases the likelihood that US monetary policy will continue to be accommodative for as long as necessary, which can’t be bad for markets.

Domestic news

Once again, the RBA opted not to cut the cash rate further from its current record low of 2.5%. The labour-market news for October continued to be mixed, with employment almost static and the unemployment rate rising to 5.7%, thus continuing its upward trend.

The exchange rate had a weak month, falling from 94.7 cents to 91.1 cents. The Reserve Bank Governor continued to do its best to talk the $A down, rightly convinced that the Australian economy would fare better with a lower currency.

Trying to get the $A down by jawboning alone puts the Reserve Bank in the position well summarised by Lady Macbeth in reference to her husband, whom she described as behaving “like the poor cat in the adage”. The adage was, apparently, “the cat would eat fish but would not get its feet wet”. You want something but you are not prepared to act to make it happen. There have, of course, been rumours that the RBA is prepared to get its feet wet (that is to intervene, buying foreign exchange and selling the Australian dollar), indeed it may already have done so. We never find out about these things until after they have happened. In any case, it’s probably best to assume that the currency will fall further.

The capital spending data provided little new information, merely confirming that we are at or near the peak of the mining capex boom.

Another rate cut remains unlikely unless the exchange rate and/or the unemployment rate head significantly higher.

We’re all getting older

It is well-known that the not only is each one of us getting older, but the Australian population is also ageing (I would far rather spell that word as aging, but that battle seems to be well and truly lost).

The Productivity Commission recently released an excellent study that deals with this issue (An Ageing Australia: Preparing for the Future, November 2013). Perhaps the most important finding is that, on an “unchanged policy” basis, government spending on health care, aged care and the aged pension will increase by about 7 % of GDP, to 17%, between now and 2060.

At the same time, GDP growth will be slowing, primarily because the ageing of the population will reduce the rate of growth of the workforce. So demographically-sensitive spending increases as a share of a pie that’s not growing as fast as it used to do. Clearly the effects will be major.

In the past, of course, demographics have worked in our favour. For most of the post-war period, part of the increase in real incomes per capita has been a result of sending an increasing share of the population out to work (mainly through increased female participation). From now on, the share of the population going to work will be on a declining trend.

In recent years also, real incomes in Australia have been boosted by the “kindness of strangers”. The commodity price boom has meant that Australia’s export prices have outpaced our import prices. This has been a major factor driving income growth, as outlined in the recent (excellent) speech by Philip Lowe, a deputy governor of the Reserve Bank. The boom is, of course, over. Our terms of trade are in decline

The third way to raise real incomes is by plain old-fashioned increased productivity. With the first two means of providing income growth moving into reverse, there will be far greater emphasis on productivity growth in the years ahead.

But what about the ageing? Is it really that big a deal?

First let it be noted that we are not the only country ageing indeed it’s difficult to find one that isn’t. It’s also worthwhile pointing out that the median age of the Australian population in 2050 will still be significantly less than the current median age in, for example, Japan and Italy.

Suppose that we examine ageing by looking at the ratio between the population 65 and over (which no longer seems particularly old to me) and the population of working age, defined as those aged 15 to 64. The next two charts show 40 countries ranked by the likely value of this ratio in 2050. Of these 40 countries, Australia will be the eighth-youngest in 2050, with Japan the oldest. Indeed, by this measure, 22 of the 40 countries are already older than Australia will be in 2050.

Aged Dependency Ratios

Aged Dependency Ratios

Source: ISI Group

But maybe it’s not how old a country is maybe it’s the extent to which it’s getting older. The next two charts therefore show the likely increase in the aged dependency ratio between now (actually 2010) and 2050. Australia is still the eighth-youngest, although only four of the seven in front of us (Luxembourg, Israel, USA and India) are common to both sets of charts. And the country aging most rapidly is South Korea, which goes from seventh-youngest to second-oldest in the 40 years to 2050. The countries toward the top end of the scale are, of course, those with low birth rates and/or little or no immigration.Change in Aged Dependency Ratios

Change in Aged Dependency Ratios

Source: ISI Group

To me, these two sets of charts put Australia’s ageing problem into perspective. Most other countries have the problem much more than we do. But there is another important issue. Who finishes up dealing with the problem? In many societies, the brunt of it falls on the families. In Australia, and the United States among others, the problem has been socialised dealing with the issue has been transferred to the government. Promises—sometimes costly ones—have been made to the elderly. This doesn’t increase the ageing problem, of course, except insofar as behavior is changed (people retire earlier than otherwise and/or overuse their underpriced health care for example). I personally have no objection to the socialisation of the issue, but it probably increases its visibility.

Chris Caton
Chief Economist


The views expressed in this article are the author’s alone. They should not be otherwise attributed.

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