Treasurer Josh Frydenberg says it’s time for the private sector to drive the economy’s recovery. And, this being a Liberal Party article of faith, he’s likely to keep saying it in this month’s budget and the election campaign to follow. One small problem: there’s little sign it’s happening.
Last week’s national accounts for the December quarter were a reminder that the economy’s living on borrowed time and stored heat. Both households and businesses are cashed up as a result of “fiscal stimulus” – government income support – and income they weren’t able to spend during lockdowns.
It’s estimated that households have an extra $200 billion or more waiting to be spent. As it is spent, private consumption will continue growing strongly in real terms. But, absent further lockdowns, there’ll be no more special support from the budget. No more JobKeeper payments and the like, no more grants to encourage home building, and a looming end to tax breaks to encourage business investment in equipment and construction.
The two main things we need to achieve continuing strong economic growth (by which I mean growth in income per person, not just more immigration) is strong real growth in household consumption spending and business investment spending.
Trouble is, last week’s figures offered little assurance that either requirement will be forthcoming. Starting with business investment, Kieran Davies, of Coolabah Capital, reminds us that (even after including intangible investment in software and research and development) it’s presently at the “extraordinarily low” level of 10 per cent of gross domestic product, similar to the lows it reached in the recessions of the 1970s and 1990s.
It may be about to take off – or it may not be. It’s hard to think why a take-off is likely. Davies reminds us that a major benefit from a big lift in business investment would be a lift in the productivity of labour, as workers were supplied with the improved equipment they need to be more productive.
Indeed, you can turn the argument round the other way and wonder if the weak rates of business investment over the past decade or so do much to help explain why productivity has improved so little over the period.
Even the most tightwad employer must agree that improved labour productivity means wages can rise faster than prices without adding to inflation.
And if we want to see consumer spending, which accounts for well over half of GDP, continuing to grow strongly once all the money households saved during the pandemic has been spent, rising real wages are the only thing that will do it.
Trouble is, the (temporary) surges in consumer spending whenever we end a period of lockdown have given the impression the economy is booming, while concealing the truth that, after allowing for inflation, wages have been falling, not rising.
This is also reflected in last week’s news from the national accounts that “non-farm real unit labour costs” – which, by comparing the change in firms’ real labour costs with the change in the productivity of that labour, reflect the division of surplus between labour and profits – have fallen by 3 per cent since the start of the pandemic.
This should not come as a surprise when you remember that, in early 2020, when we feared the battle to control the virus would send us into a deep and lasting recession, most businesses moved immediately to impose a wage freeze.
Worried about whether the deep recession would sweep away their jobs, workers and their unions accepted the necessity of the freeze.
But that’s not the way things turned out. The pandemic wasn’t nearly as bad as epidemiologists first expected it to be, vaccines turned up much earlier than had been hoped, lockdowns were often short and intermittent, and unprecedented fiscal stimulus shifted much of the cost of the lockdowns off private businesses’ profit and loss accounts and onto the public sector’s budgets.
In the main, private sector profits have held up surprisingly well.
So the key issue of whether consumer spending, and thus the wider economy, can continue growing strongly after households have finished the spending repressed during the lockdowns is what happens to wage growth. And that comes down to three questions.
First, will employees get outsized pay rises this year to compensate them for the wage freeze that turned out not to be needed?
Second, will employees also get pay rises big enough to cover all the recent increase in living costs they face – higher petrol prices and the rest – or will employers, public as well as private, ask them to “take one for the team” one more time? If so, real wages will fall further and future consumer spending will be stuffed.
Third, will the econocrats’ strategy of running a super-tight labour market force tight-fisted employers to increase wages, as the only desperation measure able to attract the workers they need?
Or will the labour shortages gradually dissipate now our border’s been reopened to overseas students, backpackers and skilled immigrants on temporary visas?
Meanwhile, the man who should be solving our cost-of-living/weak wages problem will be blustering on about the private sector taking over the running. If the Opposition can’t make this the central focus of the election campaign, it deserves to lose. It, too, would be bad at managing the economy.
