What do we need to do to get the economy growing properly again? Wait ... for at least a year.
The
most recent figures from the Bureau of Statistics confirm the economy
has grown at an average annual rate of only 2.5 per cent over the past
two financial years. Since it needs to grow at its medium-term trend
rate of about 3 per cent just to hold unemployment steady, the jobless
rate has been rising slowly over that time.
With the authorities
holding out little hope of much improvement before 2016, it is not
surprising people are wondering what more we could be doing to get
things moving. Some have noted the impending loss of jobs in car making
and elsewhere, and are wondering where the new jobs will come from.
At
such times there is never a shortage of people peddling solutions. A
perennial favourite is "industry policy" - which usually starts as a
plan to kick-start some wonderful new industry, but too often ends up
using subsidies to prop up industries from which the market has moved
away.
Business lobbies perpetually tell us tax reform that
lightens the burden on business and high-income earners would do wonders
for the economy. But though it is true the tax system could be made
more efficient, it is unlikely such reform could make more than a small
addition to growth, spread over many years.
While it is true the
economy's growth is weak because it is taking us a few years to get
things back to normal following the major change in the structure of our
economy that left us with a much-expanded mining sector, our growth
problem is cyclical - that is, temporary - rather than structural.
Abstracting
from the ups and downs of the business cycle, there is nothing
fundamentally wrong with the functioning of our economy. While, as
always, there are plenty of bits whose efficiency could be improved,
there is no reform that could make a big difference in a short time.
Some
people imagine the economy grows only to the extent the government is
doing things to push it along. It ain't true. What propels the economy,
keeping the number of jobs increasing virtually every year, is the
material aspirations of business people and households.
All the macro
managers do is hold the economy back a bit when it's going too fast, or
give it a bit of a shove when it is going too slow. In normal times,
the main instrument they use to slow things down or speed 'em up is
interest rates.
That is just what is being done now, as an
assistant governor of the Reserve Bank, Dr Chris Kent, explained in a
speech this week reviewing the state of the economy and its prospects.
He warned that "GDP growth is expected to be below trend for a time
before gradually picking up to an above-trend rate by 2016", meaning
"the unemployment rate is likely to remain elevated for some time".
Many
people devote a lot of time to following the chequered fortunes of the
big economies - the United States, Europe, Japan, China - and probably
conclude their slow growth will weigh heavily on our own.
If that's
you, Kent has news: if you take our major trading partners' growth and
weight it according to their share of our exports, it turns out our
customers' economies have been growing since 2010 at the relatively
stable rate of about 4 per cent a year, close to the long-term average.
The Reserve expects them to continue growing at that rate over this year and next. How
is this possible? Simple: over the 13 years to last year, the advanced
economies' share of our exports has fallen from 40 per cent to 25 per
cent, with the much faster-growing developing Asian economies taking
their place.
So the main adverse effects on us from the rest of
the world are our still-too-high exchange rate, which is harming the
price competitiveness of our export and import-competing industries,
and continuing falls in the prices we get for our commodity exports,
which reduce our real income.
The other big factor we will have
working to keep our growth inadequate is mining investment spending,
which "is set to decline more rapidly in the coming year or so than it
has since it peaked in mid-2012".
Most of the factors pushing the
other way arise from the stimulus provided by our exceptionally low
interest rates. These have already led to growth in home building and
some uptick in related spending on consumer durables, particularly in
NSW and Victoria.
Growth in consumer spending is being constrained
by weak growth in household income because growth in employment is so
slow and wages are rising so modestly.
Even so, the Reserve is
expecting consumer spending to be boosted by a continuation of the
modest fall in the rate of household saving we've already seen. If so,
this would represent households seeking to smooth the growth in their
consumption despite weak income growth, as well as the effect of the
rise in share and, particularly, house prices making them feel
wealthier.
A separate source of stimulus Kent expects to see is a
further fall in our exchange rate. With the American economy's recovery
now entrenched, US authorities have ended their "quantitative easing"
(creating money) and are expected to start raising their official
interest rate in the middle of next year.
Once financial markets
are convinced that tightening is on the way, the greenback should
appreciate and our dollar depreciate. This would reduce the pressure on
our tradeables industries and eventually help produce the long-awaited
lift in investment spending by the non-mining sector.
As far as
the Reserve is concerned, it has already done what needs to be done to
get the economy back to normal. It's sitting tight, waiting for its
sweet medicine to work, and thinks we should, too.
