End of term report: how has the economy fared under the Coalition?

The Coalition’s first three-year term has coincided with a good performance by the Australian economy in the face of global difficulties — but primarily driven by the mining investment boom of the Labor years, fiscal and monetary stimulus and a flexible workplace relations system that has resulted in workers trading pay rises for employment growth.

Overall, the economic growth story of the Coalition years is divided into pre-Turnbull and post-Turnbull. After the 2013 election, the economy lifted out of the torpor that had bedevilled it that year, but then it slumped back around the time of the disastrous 2014 budget. For five quarters, growth stagnated, but in the September 2015 quarter, growth lifted to 0.8% and has since reached 0.9% in subsequent quarters. Whether by coincidence or relief at the removal of Tony Abbott, the economy returned to near-trend growth with Turnbull installed as Prime Minister.

The better news is that, despite that uneven growth, we’ve enjoyed a better-than-expected employment performance. Although forecasters expected unemployment to remain above 6% for an extended period and some gloomsters forecast it would reach 6.5%, it peaked at 6.2% in early 2015 and fell across that year, hit 5.9% in November and is currently 5.7% in trend terms (now the preferred measure of unemployment for the ABS), almost exactly where it was in 2013 when the Coalition came to office.

And importantly, the participation rate, which appeared to have peaked in 2010 under Labor at around 65.7% and then slowly but steadily declined, stopped falling and is currently just under 65%, mainly off the back of an historic high in female participation, which has been over 59% for the past year — something the Coalition should take pride in.

On productivity, the news isn’t so good, but it’s still positive: the labour productivity that occurred under Labor and its Fair Work Act has levelled off but is still there. While in 2011 and 2012, growth in quarterly gross-value-added-per-hour-worked — a rough guide to market sector labour productivity — frequently exceeded 1%, in the last three years it has averaged only 0.4% per quarter, but it’s still in positive territory and ahead of where it was in 2006, under WorkChoices.

One of the reasons for our strong employment performance has been, according to the Reserve Bank, the Productivity Commission and even right-wing employer group ACCI, workers trading off pay rises for more jobs — something made possible by the flexibility available under the Fair Work Act.

[Are conservatives better economic managers?]

The Coalition has presided over the lowest period of wages growth since record-keeping began nearly 20 years ago, with private wages growth now below an annual rate of 2%. It has also presided over the most peaceful era in industrial relations history. Despite the Coalition claiming the union movement is out of control and riddled with corruption, the last three years have had the lowest level of days-lost-per-100,000-workers ever, half the level recorded under WorkChoices and around 3% of the levels seen in the supposedly halcyon era of the Accord in the 1980s.

Real unit labour costs have also stayed flat. As the RBA noted in its minutes for June board meeting this week:

“[m]embers observed a broad correspondence between movements in unit labour cost growth and the terms of trade over the past decade or so: unit labour costs had grown at an above-average pace throughout the period when the terms of trade were increasing, but were little changed over the past four and a half years while the terms of trade had been declining. This suggested that, while changes in the nominal exchange rate had played the key role in helping the economy adjust to the rise and fall in the terms of trade, this process had been assisted by adjustments in the growth rate of wages.”

While Australians have seen pay rises dry up in recent years, they’ve benefited from low inflation. Already low under Labor, inflation has fallen further still, with the most recent result in the March quarter moving into negative territory for an annual result of just 1.3%, enough to worry the Reserve Bank into cutting rates further; they now stand at just 1.75% compared to 2.5% when the Coalition came to power.

These historically low interest rates have driven massive growth in housing construction, with private dwelling unit approvals peaking at just under 20,000 a month in mid-2015 (apartment construction, in particular, has surged) and driven a property price boom, with home prices up more than a quarter since the end of 2013 in Sydney, 16% in Melbourne and nearly 10% in Brisbane.

This has meant construction has grown significantly faster as an employer since late 2013 than the overall workforce, as the sector drew in workers to meet demand. The most recent workforce breakdown data, for the May quarter, show construction employing as high a proportion of the workforce — 9% — as it did back during Kevin Rudd’s GFC stimulus period in 2009.

The other area of strong employment growth has been health, aged and childcare, which employed just over 12% when the Coalition came to office and now employs a tiny fraction under 13%, in trend terms — the biggest employing sector, and the fastest growing one as well.

[How the government got mugged by commodity prices and hubris]

But while monetary policy has done a lot of heavy lifting, fiscal policy has played its part. While former treasurer Joe Hockey blustered into office promising a new era of fiscal discipline and spending cuts, he took a deliberate decision not to go hard early with austerity, knowing full well it would send a tepid economy into recession. And while the 2014 budget has gone down as the new longest political suicide note in history, it’s important to remember many of the cuts were intended to kick in several years later, in order to mitigate their impact on demand.

While Hockey and Abbott had lost control of spending by the time they were kicked out (it had exceeded 26% of GDP, the stimulus level Kevin Rudd reached in 2009 in response to the financial crisis), they made the right call to at least temporarily keep pumping deficit spending into the economy, rather than go down the European route of slamming the economy into a wall.

That’s why the deficit this coming year will be, at $37.1 billion, higher than the 2013-14 deficit identified by Treasury and Finance in the 2013 PEFO. We’ve actually gone backwards on the deficit under the Coalition, but part of it at least has reflected sensible macro-economic judgement from a bloke who didn’t have a whole lot of that during his stint at Treasury.

Unfortunately, however, little of that spending has been directed at infrastructure, the area that, at this point, will prove to be the worst legacy of the Coalition in government. Not merely has the NBN been wrecked by Malcolm Turnbull, but public investment in infrastructure has fallen dramatically under the Coalition, from an average of $7.8 billion per quarter in 2013 to $6.3 billion a quarter in 2015.

[Infrastructure goes missing in a budget of rebranded dreams]

Despite the Reserve Bank and the International Monetary Fund urging the establishment of a pipeline of quality infrastructure projects, public infrastructure investment slumped under the Abbott government and was cut further in Scott Morrison’s first budget in May. The Coalition’s deficit spending hasn’t flowed into productivity-enhancing infrastructure projects, but funded recurrent spending across the budget.

Stimulus has also come from a continuing strong export performance, driven by commodity exports despite the falls in the iron ore price. In some quarters over the last three years, it was primarily exports driving growth — many of them flowing from mining projects financed and undertaken while Labor was in office.

Despite the mining tax, despite the 30% company tax rate, despite the Fair Work Act — all maligned by the Coalition and business groups. Labor had presided over a historic surge in mining investment that has continued to power a strong export performance under the Coalition.

Looking at the sharemarket — that traditional measure of conservative braggadocio — the ASX 200 has hardly moved in years since the last election; it’s currently in the red, fueled by the Tory debacle of Brexit, by around 3%. Leaving your money in a bank would have done as well or better — so it’s no wonder property investment, especially by self-managed super funds, has taken off.

For a government that announced on election night that Australia was “open for business”, it hasn’t proved particularly good for investors. More broadly, however, the economy has performed — and the Coalition can take credit for at least a little bit of that. But the Reserve Bank, Australian workers, their Labor predecessors and even Joe Hockey can take some as well.