Jobs now, wages later
Business Outlook December 2017
- Global growth is its strongest in years. And the big picture remains growth-friendly: weak inflation means the global cost of capital is only lifting very slowly from its record lows, thereby allowing economies the breathing room to grow. And growth is synchronised to a degree not seen in a decade: Europe is looking very healthy, the US might get a tailwind from tax cuts, Japan is slipstreaming a weak yen, and China continues its remarkable run of growth. So smell the roses. There’s a lot going right, and 2018 looks set to top 2017 – itself a good year. But don’t lose sight of the medium term caveats: China’s strength will continue to ease, while global interest rates will eventually rise. So although 2018 will register yet another improvement in global growth, the peak of the current world business cycle may be already on the horizon.
- The global backdrop of good growth yet weak inflation is music to Australian prospects, ensuring a firm floor under our export earnings while keeping the threat of any interest rate rises well at bay. That mix of good global growth with a record low cost of capital saw Australia’s growth pick up pace over the course of 2017, and we should maintain momentum through 2018, continuing a record breaking run of job gains. That’s a pretty good outlook. Yet neither families nor politicians are likely to get much happier unless and until wage growth finally climbs off the floor. In part that’s because job growth is excellent news for the few, while wage growth is positive news for the many. That broadening in the gains from prosperity is therefore keenly awaited. So it’s good news that we do see wage growth as being near its lows – though the forecast lift in wage gains will be both slow and modest, leaving those gains below the official forecasts for them.
- Consumer price inflation remains but a memory both globally and locally, and the task of most central banks is now to coax it up rather than to choke it off. That’ll take time in Australia, as none of the big drivers of inflation – a strong economy that gives businesses pricing power, or wage growth above productivity growth, or rising import prices due to a falling $A – suggest inflation will be anything other than slow to climb from here. Yes, it will eventually gain greater altitude, as will wage gains, but only slowly so for both of them as underemployment eases and capacity tightens.
- Inflation is still too sleepy to drive interest rate rises through 2018: the world is stubbornly slow to reflate, and that is leaving central banks travelling pretty slowly in their quest to lift rates from what, in many places, are still record lows. The story’s the same in Australia. That’s good news for property owners, as it says that the Reserve won’t be raining on their parade (or their housing prices) any time soon. But it also means accepting rising vulnerability, as Australian families continue to take on debt with the same glee that Sam Kerr kicks goals. Yet one place where rates are going up is the US. That means there’s no longer any interest rate differential between Australia and Uncle Sam for the first time in two decades. That removes one leg of support for the $A, and changed political dynamics in China – which may adopt less hell-for-leather in its growth policies – adds another layer suggesting the dollar may ease further in the next few years.
- The balance of payments has recently been happier than it’s been in ages. Yet, a combination of easing commodity prices and rising global interest rates may be the one-two punch that sees the recent dalliance with balanced external accounts (calendar 2017 saw the smallest current account deficit as a share of national income since the 1970s) slowly fall back more deeply in the red.
- More of Australia’s growth is showing up in jobs rather than in wages, with workers and businesses seemingly more interested in extra jobs (and extra hours) than in stronger wage increases. That gap will fade a little in 2018 as the good news on jobs gradually morphs into good news on wages. Yet that change is likely to be slow, meaning that outperformance on jobs will linger for longer.
- Here we go again: a government lagging in the polls looks set to leave behind a poison pill. Labor did it with spending in 2013, the Coalition with tax cuts in 2007, and now 2018 looms as a “battler’s Budget” of tax cuts. That undermines Budget repair. The Coalition’s Plan A was to cut spending, but in May 2017 it switched to Plan B: raising taxes. Six months later, it flagged cutting taxes. Until politicians stop mollycoddling their bases, Budget repair looks unlikely. Don’t forget Budget repair protects prosperity by boosting the firepower to defend against the next recession. That’s desperately needed, as neither the Reserve Bank nor Canberra have much ammo at their disposal. And it fights for fairness by addressing the huge future tax bill being run up at the expense of younger Australians – whose future is being mortgaged fast by today’s leaders.
The tussle at the top – industry growth rates
- Australia’s economic growth lifted through the course of 2017, supported by an improving rate of global economic growth. However, within that rising tide, some components of spending performed better than anticipated (notably exports and business investment on the back of strong business confidence and low borrowing costs, which have also fired up jobs growth). That has helped to support sectors such as engineering construction, mining, agriculture, tourism and business services. Other components of spending came through 2017 in worse shape – notably housing investment (given looming oversupply) and consumer spending (based on weak wages growth and consumer confidence). That helps to explain why sectors such as retail trade, property services and parts of finance have weakened.
- That combination of unders and overs leaves the Australian economy with some momentum going into 2018. While weak wage growth is a constraint for consumer driven sectors, wage restraint combined with reasonable productivity gains is a reason that businesses are confident to hire and to invest, particularly as global economic conditions continue to improve. There are worse positions for the economy to be, and provides good opportunities for investment driven sectors of the economy.
- Government driven sectors such as health care and education have also had a good 2017, with the Federal government keeping only a loose rein on spending, and NSW and Victoria swimming in surging stamp duty revenues. However, with a likely levelling out or fall in residential property prices, and ongoing concerns over Australia’s AAA credit rating, government driven sectors may lose some momentum over time.
It’s just a jump to the south and east
- Australia’s States are benefiting from some of the most favourable global economic conditions seen in years. China’s economy continues to charge ahead, keeping commodity prices high. That boosts export earnings for the commodity rich States of West Australia, Queensland and the Northern Territory. At the same time good global growth hasn’t come at the expense of a materially higher outlook for Australian interest rates, thereby keeping the botoxed housing markets of NSW, Victoria and the ACT from being squeezed. And both South Australia and Tassie are performing solidly – in the case of SA, confounding the critics as it does so.
- NSW’s economy seems set to stay pretty pumped in 2018 as infrastructure spending really hits its straps, and with the Reserve Bank likely to stay on the sidelines – and hence unlikely to play party pooper for the Premier State’s stretched housing valuations.
- When it rains it pours, at least when it comes to population growth in Victoria. Massive population growth is keeping the State economy growing at pace, as both business and government invest in new capacity to keep up with rising demand.
- The storm clouds continue to clear for the Sunshine State. Queensland has returned to its status as a preferred destination for Australians on the move, while the strong global environment has boosted demand for the State’s key exports – minerals, education and sunshine.
- South Australia is doing better than many people realise – much better. Although there are undoubted challenges, including in energy, and the car manufacturers have only just shut up shop, South Australia’s economy is growing at about its fastest rate for this decade so far. Not bad, huh?
- The West Australian economy has learnt the hard way that it takes a bunch more workers to build a mine than it does to operate it. But with that transition almost complete, there should be better days ahead as a strong China keeps commodity prices and export earnings supported.
- Tasmania has seen a relative resurgence in recent years as the lower Aussie dollar has boosted the farm, manufacturing and tourism sectors. And the outlook remains solid: the ‘Airbnb’ effect and stronger population growth have made the Hobart housing market the hottest in the land.
- The Northern Territory economy is riding towards the end of its resource construction boom. But with no large project in the pipeline to replace the very near completion of the Ichthys LNG mega project, the glory days of the resource construction boom are firmly in the rear view mirror.
- The ACT economy sprinted through 2017 thanks to its strong housing market slipstreaming the mix of low interest rates and good population growth. Additionally, the lack of will from Capital Hill to drive further spending cuts has taken some of the pressure off the ACT’s biggest employer.