With the year rapidly drawing to a close, the chief manager of the economy has given us a good summary of where it looks like going next year. The word is: we're getting back to normal, but it's taking a lot longer than expected.
The chief manager of the economy is, of course, Reserve Bank governor Dr Philip Lowe, and he gave a speech this week.
For years Lowe and others have been tell us the economy is making a difficult "transition" from the resources boom to growth driven by all the other industries. But now, he says, it's time to move to a new narrative.
"The wind-down of mining investment is now all but complete, with work soon to be finished on some of the large liquefied natural gas projects," he says.
Mining investment spending rose to a peak of about 9 per cent of gross domestic product in 2013, but is now back to a more normal 2 per cent or so.
This precipitous fall has been a big drag on the economy's overall growth, meaning its cessation will leave the economy growing faster than it has been.
As Lowe puts it, "this transition to lower levels of mining investment was masking an underlying improvement in the Australian economy". The decline in mining investment also generated substantial "negative spillovers" to other industries, particularly in Queensland and Western Australia.
This is a good point: weakness in the mining states has made the figures for the national economy look below par, even though NSW and Victoria have been growing quite strongly.
The good news, however, is that these negative spillovers are now fading. In Queensland, the jobs market began to improve in 2015, and in WA conditions in the jobs market have improved noticeably since late last year.
This is one reason Lowe expects the economy's growth to strengthen next year. Another is the higher volume of resource exports as a result of all the mining investment.
"We expect GDP growth to pick up to average a bit above 3 per cent over 2018 and 2019." This may not sound much, but "if these forecasts are realised, it would represent a better outcome than has been achieved for some years now.
"This more positive outlook is being supported by an improving world economy, low interest rates, strong population growth and increased public spending on infrastructure," he says.
And the outlook for business investment spending has brightened. "For a number of years, we were repeatedly disappointed that non-mining business investment was not picking up . . .
"Now, though, a gentle upswing in business investment does seem to be taking place and the forward indicators [indicators of what's to come] suggest that this will continue.
"It's too early to say that animal spirits have returned with gusto. But more firms are reporting that economic conditions have improved and more are now prepared to take a risk and invest in new assets."
The improvement in the business environment is also reflected in strong employment growth. Business is feeling better than it has for some time and is lifting its capital spending as well as creating more jobs.
Over the past year, the number of people with jobs has increased by about 3 per cent, the fastest rate of increase since the global financial crisis.
The pick-up is evident across the country and has been strongest in the household services (which include healthcare, aged care and education and training) and construction industries.
It's also leading to a pick-up in participation in the labour force, especially by women.
So, everything in the economic garden is back to being lovely?
No, not quite. Consumer spending – by far the biggest component of GDP – "remains fairly soft". It's been weaker than its annual forecast since 2011 and hasn't exceeded 3 per cent for quite a few years.
Why? Because of weak growth in real household income and our very high level of household debt. The weak growth in household income is explained mainly by the weak growth in wages for the past four years, which have barely kept pace with (unusually low) inflation.
Lowe says "an important issue shaping the future is how these cross-cutting themes are resolved: businesses feel better than they have for some time but consumers feel weighed down by weak income growth and high debt levels".
Let me be franker than the governor. The economy won't get back to anything like normal until we get back to the modest rate of real (above inflation) growth in wages we've long been used to.
Just what's causing the weakness in prices as well as wages – which is a problem occurring in most other developed economies – and whether the problem is temporary or lasting, is a question that's hotly debated, with Lowe adding a few pointers of his own.
He thinks it's partly temporary, meaning wage growth will soon pick up from its present (nominal) 2 per cent a year, and partly longer-lasting, meaning it may be a long time before it returns to its usual 3½ to 4 per cent.
"We expect inflation to pick up, but to do so only gradually. By the end of our two-year forecast period, inflation is expected to reach about 2 per cent in underlying terms . . . Underpinning this expected lift in inflation is a gradual increase in wage growth in response to the tighter labour market."
Here's his summing up:
"Our central scenario is that the increased willingness of business to invest and employ people will lead to a gradual increase in growth of consumer spending. As employment increases, so too will household income. Some increase in wage growth will also support household income.
"Given these factors, the central forecast is for consumption growth to pick up to around the 3 per cent mark" – which would still be below what was normal before the GFC.
