Here we are at the end of week two of the election campaign. There are just three weeks to go and the debate on the economy remains uninspiring, narrow and glib.
In terms of the hard news on the economy in the past week, including the things that should be elevated in the campaigning discourse, we saw the release of the Pre-Election Economic and Fiscal Outlook document from Treasury and the Department of Finance.
It was interesting that the PEFO went through to the keeper with little fanfare as it simply reiterated what was already well known about the economy and the budget. Based on Treasury’s particularly downbeat view on the economy, commodity prices and activity in major trading partners, PEFO confirmed the forecast that 2013-14 is set to record sub-trend economic growth and as a result, there is forecast to be a rise in the unemployment rate. These dynamics are combining to eat away at government revenue flows to the point where the budget deficit is forecast to be a touch wider than was estimated back at budget time in May.
There were some interesting updates on business confidence, consumer sentiment and wages during the week.
The NAB survey showed a sluggish level of business confidence and conditions in July although the various measures were not much changed from the month before. The NAB survey should have played into the Coalition’s hands as it has been magnifying any negative economic news to support its assessment that the economy and budget are in some form of emergency.
The various measures contained in the NAB survey were consistent with the current sub-trend GDP growth rate rather than anything worse. Perhaps that is why the news was not a high-profile issue in the campaign week.
There was unambiguously upbeat news with the Westpac index of consumer sentiment jumping a decent 3.5 per cent in August to reach a level above the long-run average. This level for consumer sentiment, if sustained, means that there is likely to be an acceleration in the growth rate of household consumption spending in the next quarter or two, which is something that the Reserve Bank and Treasury are talking about as the mining investment phase starts to taper off.
This slightly elevated level of consumer sentiment is consistent with a stronger rate of consumption growth assumed by Treasury in PEFO, which together with the recent interest rate cut, commodity price rise and better global data suggests significant upside to the economic forecasts in PEFO (see A commodity cure for economic ills?, August 14).
But that is for another day.
The other very important economic news during the week caused barely a ripple, despite the fact that the news on wages provided both sides with some foundation for their economic claims.
The Wage Price Index rose at a tepid 2.9 per cent annual pace in June to be at its slowest rate of increase in more than a decade.
This suggests that there could be additional ‘cost of living pressures’ as the household income side of family finances registers only moderate increases. One might have supposed that the Coalition would have tried to make something of this.
Even with the moderate increase in wages, the figures confirmed yet another year where wages growth has outpaced the rate of inflation. In other words, ‘cost of living’ pressures are in fact receding given the boost to purchasing power from a sustained period of real wage rises.
The moderation in wages growth, from an annual pace of nearly 4 per cent a little over a year ago, also puts paid to the notion that the Australian labour market is in need of significant reform.
Think about it.
The economy has slowed over the past year, which has seen the unemployment rate inch up from around 5 per cent to 5.7 per cent. This increase is relatively moderate and owes a lot to the current flexible labour market. This flexibility is seen in a scaling back in hours worked, which has helped preserve employment, and has been complemented by wages flexibility, which in the current soft conditions has seen growth in labour costs slow.
Looked at another way, if the labour market were unnecessarily inflexible and in urgent need of reform, wages growth would have remained higher despite the deceleration in GDP growth and rise in unemployment, and this would have inevitably pushed the unemployment rate even higher.
There was something for everyone in the wages data, but alas, neither side tried to use the fresh news in the election campaign.
Next week is virtually data free. There may be something in the new motor vehicle sales data given the kerfuffle over the government’s announcement of changes in the fringe benefits tax rules on cars, although it may be too early to see any effect this month.
The Reserve Bank also releases the minutes of its board meeting, which will outline in a little more detail the discussion which led to the interest rate cut earlier in the month.
The more important news will come in the final week of the election campaign when there is another meeting of the Reserve Bank board, as well as the June quarter GDP result.
It would seem that from the campaign so far, these data would need to produce extreme results to garner much attention the hustle and bustle of the final week of the campaign.
Stephen Koukoulas was senior economic policy advisor to former prime minister Julia Gillard between September 2010 and July 2011.