Forget housing, the real budget test is on wages and growth

While the political focus has been on housing and corporate tax cuts of undetermined, likely trivial, economic impacts, the real economic issue is slow employment growth, slow wage growth and weakish consumer demand.

In fact Australian businesses are doing well currently, even before their pointless windfall of a tax cut — the National Australia Bank monthly survey for March on Tuesday showed a sharp improvement in business conditions to their highest level in eight years. According to NAB’s chief economist Alan Oster, that could have been partly due to a lower response rate in cyclone-hit North Queensland. “Even so,” he said, “conditions have improved almost across the board to levels that suggest a strong economy in the near-term.” 

The survey showed most industries were enjoying improved conditions, with services the stand-out performer and the long-struggling mining industry improving thanks to higher commodity prices and an improved global demand outlook (the iron price is currently experiencing a dive that will cause some nosebleeds in Treasury, which is currently preparing tax revenue forecasts — but it is still well above levels on 2015 and 2016). Oster said the results were encouraging for the near-term outlook and supported the bank’s forecast for economic growth to accelerate in the second half of 2017. However, he says, “there is still cause to be cautious about the longer-term outlook, particularly as other growth drivers, including LNG exports, commodity prices and housing construction, begin to fade.”

But retail conditions bucked the trend in the NAB survey — which was not unexpected given the shock sales and earnings downgrades from companies at different ends of the retail spectrum — discounter the Reject Shop, and luxury brands seller, Oroton Group.

That reflects an ongoing weakness that has baffled and worried the Reserve Bank: in wages growth, unemployment and consumer demand. This is despite years of heavy fiscal stimulus from the government’s deficit spending — which looks set to continue until the 2020s — and heavy monetary stimulus from record low interest rates, which similarly won’t be ending any time soon.

This morning’s jobs data for March showed some signs of improvement in the labour market, with full-time jobs growing in trend terms, although monthly hours worked fell slightly and the unemployment rate rose in trend terms to 5.9% (seasonally adjusted, steady at 5.9%). The increase in the trend unemployment rate, however, was partly driven by a rise in participation, which is a positive sign for the overall labour market.

As Oster notes, the stimulus from the recent housing boom has probably also peaked. It will still be a powerful source of jobs, because dwelling approvals remain at historically high levels and a lot of projects will take months and maybe over a year to complete. But we may be looking at diminishing returns from the traditional source of Australian growth as lending standards tighten and worries about an apartment glut in Melbourne and Brisbane curtail new developments — luckily there are still foreign buyers driving new property construction.

And while there’s political calculation in Scott Morrison’s “hasten slowly” mantra on housing affordability, he’s right to be wary of triggering a correction in property, given even a limited one will accelerate the tail-off in housing-sector stimulus to the rest of the economy. But elsewhere on policy, if anything, the government appears to have its priorities reversed — looking after business at a time of good conditions while pushing for wage cuts for low income earners at a time of minimal wages growth. Especially given low income earners spend much more of their income than the rest of us.

Falling iron ore prices aren’t the only worry for Morrison, his Secretary John Fraser and Treasury as it puts the budget together. Weak consumer demand and low wages growth will continue to undermine forecasts both of the economy’s performance and the amount of revenue the government can bank in. And while the political test of the budget will be what it offers on housing affordability, the macroeconomic test will be how it addresses the problem of soft wages and increasingly shy consumers.