Do you know what economists mean when they talk about the nation’s “economic fundamentals”? I thought I did until I heard what Reserve Bank governor Dr Philip Lowe said they were.
When Lowe had a meeting with Treasurer Josh Frydenberg after last year’s election, I was puzzled by him saying that the economy’s fundamentals were “sound”. How could he say that when the economy had grown by an exceptionally weak 1.8 per cent over the year to March?
But at his appearance before the House of Reps economics committee last week, he had to respond to a challenging description of the state of the economy by Labor’s Dr Andrew Leigh, a former economics professor.
“We have seen declines in labour productivity for the first time on record, the slowest wage growth on record, declining household spending per capita, record household debt, record government debt, below average consumer confidence, retail suffering its worst downturn since 1990 and construction shrinking at its fastest rate since 1999,” Leigh said.
“The economy is in a pretty bad way at the moment, isn’t it?” he asked.
“That wouldn’t be my characterisation,” Lowe responded. “One thing you left out of that list is that a higher share of Australians has jobs than ever before in our history ... ultimately what matters is that people have jobs and employment and security.”
What’s more, “our fundamentals are fantastic”, Lowe went on – but this time he spelt out what he meant.
“We enjoy a standard of living in this country that very few countries in the world enjoy. More of us have jobs than ever before. We live in a fantastic, prosperous wealthy country, and I think we should remember that.”
Well, if that’s what he thinks our fundamentals mean, who could argue? Even if Leigh thought the weaknesses he was outlining were a description of our fundamentals. Maybe Lowe’s fundamentals are more fundamental fundamentals than other people’s are.
Under further questioning from Leigh, however, Lowe said he didn’t want to deny that “we have very significant issues, and the one that worries me most is weak productivity growth ... We’ve had four or five years now where productivity growth has been very weak ... in my own view it’s linked to very low levels of investment relative to gross domestic product.”
This is an important point. As former top econocrat Dr Mike Keating has been saying for some years, you can take a neo-classical, supply-side view that weak productivity improvement explains why the economy’s growth has been so weak (a view that assumes productivity improvement is “exogenous” – it drops on the economy from outside), or you can take a more Keynesian, demand-side view that weak economic growth explains why productivity improvement has been so weak (that is, productivity is “endogenous” – it’s produced inside the economy).
Keating keeps saying that it’s when businesses upgrade their equipment and processes by replacing the old models with the latest, whiz-bang models that improving innovations are diffused throughout the economy, making our industries more productive.
Why is it that our businesses (particularly those other than mining) haven’t been investing much in expanding and improving their businesses? The simple, demand-side answer is that they haven’t been seeing much growth in the demand for their products.
But Lowe sees something deeper. “I fear that our economy is becoming less dynamic [continuously changing and developing],” he told the economics committee. “We’re seeing lower rates of investment, lower rates of business formation, lower rates of people switching jobs, and in some areas lower rates of research-and-development expenditure.
“So right across those metrics it feels like we’re becoming a bit less dynamic. I worry about that for the longer term.
“Public investment is not particularly low at the moment. What is low is private investment. Firms don’t seem to be investing at the same rate that they used to, and I think this is adding to the sense I have that the economy is just less dynamic ...
“There’s something deeper going on, and it’s not just in Australia: it’s everywhere. At the meetings I go to with other central bank governors, this is the kind of thing we talk about. Something’s going on in our economies that means the same dynamism that used to be there isn’t there.”
Asked later by another MP what was causing this loss of dynamism, Low replied, “I wish I knew the answer to that ... My sense is, as an Australian and looking at what’s going on in our economy, that we’re becoming very risk-averse.” (A sentiment I know other top econocrats share.)
“It’s a global thing that happens – I think it probably happens partly when you’re a wealthy country. The standard of living here is fantastic. It’s hardly matched anywhere in the world, so we’ve got something important to protect,” he said.
“But I think in that environment you become more risk-averse. Probably with the ageing of the population, we become more risk-averse. When people have a lot of debt, they’re probably more risk-averse.
Risk-aversion seems to help explain the slow wage growth we’ve had “for six or seven years” now. “It’s the sense of uncertainty and competition that people have, and this is kind of global. Most businesses are worried about competition from globalisation and from technology, and many workers feel that same pressure.
“There are many white-collar jobs in Sydney and Melbourne and Canberra that can be done somewhere else in the world at a lower rate of pay, and many people understand that ...,"Lowe said.
“So the bargaining dynamics ... for workers is less than it used to be. And firms are less inclined to bid up wages to attract workers because they’re worried about their cost base and competition,” he said.
Doesn’t sound too wonderful to me. But not to worry. Just remember, our fundamentals are fabulous.
