Hockey must work an economic miracle

On so many issues, Treasurer Hockey is between a rock and a hard place. Keeping growth alive will be an extraordinary achievement.

If ever a Treasurer has had a spinning-plate trick on his hands, it's Joe Hockey. When he returns from his G20 discussions in the US, Hockey will need every ounce of skill to keep the sticks and plates spinning lest one should fall, bringing the economy down with it.

What are the plates? In no particular order, the main ones are: the housing market, the Aussie dollar, business and consumer confidence, business investment, the jobs market and immigration.

Spend too long spinning one, and the others lose momentum. It really will be an extraordinary achievement if Hockey can pay attention to them all, and avoid a once in a generation tumble in living standards.

If that sounds too bearish, consider what Treasury Secretary Martin Parkinson said about income growth over the next decade in his recent Sydney Institute speech:

"If labour productivity were to grow at its long-term average, per capita incomes would grow on average over the decade ahead by only 0.7 per cent per year, leading to real income per capita of around $69,000 by 2024.

"These rates would be much less than the 2.3 per cent growth Australians are used to, which would otherwise yield a real income per capita of around $82,000 by 2024. So there’s a gap of around $13,000 per person between what Australians might hope for and expect, and what might come to pass, on the basis of a reasonably benign scenario.

"By the end of the decade, we will face growth in income per capita of around the rates experienced over the decade ending with the recession of the early 1980s."

Parkinson, and presumably Hockey, knows how delicate the fundamentals of the Australian economy have become. For instance, recent jaw-boning by RBA governor Glenn Stevens is revealing. He has, in his taciturn way, tried to warn housing market investors that house prices can go "down as well as up" because he knows record low interest rates are feeding a growing bubble.

As both Steve Keen, and more recently Chris Joye (once diametrically opposed on the issue) are warning, the level of private debt in this country has become dangerous. Most of that debt is tied up in mortgages. In more normal times, the RBA would be tightening and house prices, though high, would stabilise. But that is just not an option now -- Stevens knows that hiking rates will push the dollar up yet again and stomp on weak shoots of business investment and job creation.

So monetary policy is, for the time being, side-lined -- jaw-boning from the governor is about all we can expect. Cutting government spending in the May budget may make some room for rate rises, but only if the sudden withdrawal of public spending is replaced by private sector spending -- which at present does not look likely.

So with low rates continuing, the housing bubble grows. There were indicators in Thursday's labour force data that a good slice of jobs created in the past couple of months were in the finance industry, especially in NSW. That was celebrated by some -- for this columnist, it's another chilling example of how badly off-course the economy is veering. We do not need to further pump up house prices with borrowed money. What's needed is jobs for the people who live in those houses.

Yes, it's true that new jobs are also being created in the construction sector, and something of a house-building boom is underway.  Just as well, as population growth continues apace, and each new-born or migrant wants a home. To the glass-half-full economist, this is all good news -- people are borrowing to buy and build houses, migrants continue to flood into the country to ensure continuing demand for dwellings, and the finance industry is growing to furiously match savers to spenders just as it has done for a good 15 years.

Trouble is, there is a big fly in the ointment. The reason Joye and others are now sounding a warning bell on housing is that incomes and the level of debt they are servicing are diverging at at rapid pace. It is for this reason alone that Joye could argue four years ago that owing 175 per cent of annual disposable incomes was acceptable, whereas owing 177 per cent today is not -- income growth is not tracking house-price growth nearly as well as it did four years ago (and even then it was not keeping up).

Joye wrote last week: "... there is a fundamental difference between house prices tracking income growth, as they did in 2010, and house prices inflating at 3 to 4 times the rate of incomes, as they are today."

I won't engage with the Keen-Joye debate today. Suffice to say that one of Keen's central arguments is that whenever house prices have looked vulnerable, government policy has applied the defibribulator and shocked them back into growth. First-home buyers' grants (or home vendors' grants, as Keen calls them) is one way to do this. Allowing high migration levels is another. And, of course, making room for the RBA to run loose monetary policy is another.

Today I want to focus on the only one of those options left -- migration -- as state and federal budgets just can't afford first-home buyer grant splurges, and rates are already at record lows. So should we 'open the migration spigot' as some housing market watchers have called it in the past? If you believe Glenn Stevens' equally jaw-boning remark that we'll have a shortage of workers, not jobs, in years ahead, the answer would be a resounding 'Yes!'

Well, I don't believe that statement is anything more than an attempt to talk up an economy in grave danger. If it were that simple, we could ramp up migration to fill all those lovely jobs, and house prices and their attendant wealth affect would keep rising. Consumer sentiment would rebound, businesses would invest and all our problems would be solved.

Current indicators, however, suggest a very different scenario. First, look at how net migration levels were ramped up under the Howard government, and how they continued at high levels through the Rudd/Gillard years (see chart below).


Graph for Hockey must work an economic miracle

Some critics of that policy argued it was done for cynical reasons -- to pump up demand for the housing finance industry, and help the whole country go on a debt-fuelled consumption binge that extended right up to 2009 when serious domestic deleveraging began. While that cynical view may have motivated some politicians, senior sources working with the Treasury over those years have told me that both Coalition and Labor governments were "scared they'd run out of workers for the mining boom".

History shows that side of the policy worked. We did not run out of workers, inflation was contained and if we all got drunk on debt-funded consumption, that was a by-product of the shift to higher migration, not its raison d'être. The question that will be bugging Hockey when he returns from Washington is: "Can Glenn Stevens possibly be right -- that we'll run out of workers, not jobs?"

The evidence is stark and unsettling. While commentators gleefully received Thursday's labour force data as a 'sudden fall' in unemployment, the truth is that it was nothing of the kind -- as Business Spectator's Callum Pickering explained.

For some time I have been tracking 'total hours worked' as a proxy for the shift from full-time employment, to part-time and the therefore 'under-employment'. What I did not do the last time I looked at the hours-worked data (Does WA care about Shorten's jobs crisis?) was correct it for the continuing levels of population growth.

In the chart below, the final two points of 'estimated resident population' (ERP) have been extrapolated, as the ABS has not released its figures yet. However, ERP has grown in an almost perfectly linear way over the past years, so this is a pretty safe assumption.


Graph for Hockey must work an economic miracle

Up until the GFC, total hours worked per resident was climbing towards 73 hours per month. It dipped and rose after the Lehman Brothers credit crunch, but since late 2011 it can be seen to be tracking down to around 69 hours at present.

If Hockey is successful in his incredibly delicate balancing act, he will hope that migration can be allowed to continue at high levels, construction and finance work will spark wider consumer confidence, wary businesses will begin to invest, and the number of hours worked per Australian will begin to rise. If that is coupled with the kind of productivity growth Parkinson dreams of, then we might come through this hazardous phase for the economy without those plates falling.

But that's a lot of 'ifs'.

Hockey needs rates to rise, and rates to stay low. He needs more people coming into the country, and fewer people arriving to compete for scarce jobs. He needs to spend to keep public-funded demand high, and stop spending to bring the budget back into balance. He need soaring house prices to boost confidence, and moderating or falling house prices to prevent a dangerous credit bubble.

Keep spinning the plates Treasurer. I can say without a hint of irony or schadenfreude that I hope you can pull off this most spectacular of tricks.