For all the political theatrics -- the talk of deficit taxes, welfare cuts, and Boston Legal-style cigar smoking -- what Australians really want to know is: what will happen to my job? How will this impact my job security?
On Friday last week the Reserve Bank of Australia released its Statement on Monetary Policy, which contained an interesting section on the relationship between economic growth and measures of employment and wages.
The report indicates that improvements in employment tend to lag the economic cycle. For example, following a rise in output, firms may initially attempt to generate greater production through their existing workforce by, for example, increasing employees’ hours or by making greater use of underutilised capital.
Wages often take even longer to respond, with the RBA noting that “collective agreements, which underpin the employment contracts of around 40 per cent of workers, are typically renegotiated only every two or three years”. In addition, award wages and the national minimum wage are adjusted only once a year.
The Australian economy picked up over the past year, led by retail spending and exports, with the RBA forecasting growth of around 3 per cent over the year to the June quarter 2014. Based on the centre-point of their forecasts, the RBA expects growth to moderate slightly over the 2014/15 financial year (Can the RBA defuse a mining time bomb?, May 9).
But the central bank’s forecasts were prepared based on the most recent updates by state and federal governments. So these forecasts do not incorporate many of the spending cuts or tax changes leaked by the Coalition in recent weeks. In a recent note, Westpac chief economist Bill Evans estimated that fiscal policy in 2014/15 will tighten by around 0.5 percentage points of GDP.
The deficit tax itself will have a limited impact on spending and employment. Based on its latest incarnation, the measure is only set to raise around $700 million per year, which is just 0.1 per cent of household spending. Furthermore, high-income households have, on average, a relatively low marginal propensity to consume -- which means that, compared with low-income households, they spend a lower proportion of each additional dollar they earn.
The welfare cuts are set to have a much larger effect, in part because the spending cuts are likely to dwarf the additional revenue generated by the deficit tax but also because of the recipients’ higher propensity to consume. Both measures have already had an impact on consumer confidence measures. We will gain a greater feel for business conditions later today.
Treasurer Joe Hockey is talking up greater infrastructure spending but even if realised, the benefits of that will not be felt in the near term (Budget won’t ‘slash and burn’: Hockey, May 12).
On that basis, the near-term peak in growth could occur as soon as the 2014 March or June quarter. Based on the RBA’s findings, the unemployment rate is set to decline a little further through to September and stabilise after that. Employment growth could continue to firm up through to early 2015 but momentum will be hard to maintain and I remain fairly pessimistic about the employment outlook into 2015.
Obviously though, the relationship between GDP and employment is far from exact, creating considerable uncertainty around the outlook. Nothing is set in stone.
With substantial spare capacity remaining in the labour market -- even after growth peaks this year -- it is hardly surprising that wage pressures will remain benign. Wage growth is set to remain at historically low levels for some time yet. Consequently, measures of inflation are likely to remain within the RBA’s annual target of 2 to 3 per cent inflation.
For readers, the outlook for employment is positive -- at least in the near term -- but growth is unlikely to be sufficient to bring the unemployment rate down significantly. Employment growth will continue at a moderate pace through to 2015 but the outlook becomes more pessimistic after that. Wallets will remain tight due to subdued wage growth.
A cautious approach is advised for households; taking on leverage and eating into your savings is hardly advised given the considerable uncertainty surrounding the Australian economy. The near term might be positive but there remain substantial challenges that will be difficult to manage without some collateral damage.