The Australian economy is behaving strangely

By MILLIE MUROI, Economics Writer

Australian consumers are usually the engine room of the economy. Every extra dollar we spend drives economic growth higher – and there’s so many of us that we’re usually a force to be reckoned with. In the three months to September, though, something strange happened.

We had more income to splurge but shied away from spending much of the extra cash according to national accounts data from our number-crunchers at the Australian Bureau of Statistics this week. Instead, a bigger share of our pay made its way into piggy banks, mattresses and bank vaults.

Households, while still accounting for nearly half the economy, took a back seat. So, how did the Australian economy still manage to step up?

The size of our economy can be measured in three ways: output (the amount of goods and services we pump out), income (the amount of profit pocketed by businesses and pay that has flowed into households) or by looking at all the spending that happens.

That last one includes money spent by the government, businesses, foreigners (buying up our exports) and our heavy lifters: households. Since the mid-2000s, household consumption has accounted for at least half the size of our economy. It’s only this September quarter that household spending dropped to less than half of gross domestic product (GDP).

Does that mean households are struggling? Well, it depends on how you look at it.

If people’s shopping receipts are any indication of their living standards, you could argue things are looking pretty stagnant. Household spending came in flat at 0 per cent growth.

And, in fact, if we look at spending per household, we’re grinding backwards. Why? Because our population has been boosted by migration. While overall household spending has stayed flat in the September quarter, we’re individually spending less than we were earlier in the year. And that’s after we saw total household spending growth turn negative the previous quarter.

Growth for the wider economy has also been slipping into reverse when we account for population growth. Looking at economic growth per person, we’ve been sliding backwards for nearly two years.

Back to households, though. It’s not all bad news. We actually spent a touch more on discretionary goods and services – things we may not need but are nice to have, such as new clothing and recreation. Spending on essentials, meanwhile, fell. We spent more on things such as rent and staying healthy, but dished out far less on electricity and gas thanks to a warmer-than-expected winter, and partly thanks to the government’s energy bill relief that took the heat out of our energy bills.

Household disposable income – the amount we have left over to spend or save after paying our taxes – also grew. Not only did our income (at least collectively) grow by 1.3 per cent, mainly thanks to pay rises, many of us also had our taxes slashed, too. Stage 3 tax cuts came into play in July, pushing down the income tax we paid during the quarter by 3.8 per cent. Those who had money stashed in the bank also got a boost from interest rates on deposits.

But we didn’t do what a lot of economists (and the Reserve Bank) expected us to do – or at least not to the degree they thought we would. Instead of going on a spending spree with our extra cash, we squirrelled a lot of it away. It’s common for people, especially when they’re worried about their finances, to take a while to work out how they are going to spend their extra money.

The household ratio of saving to income – which tells us how much of our disposable income we stowed away for a rainy day – grew from 2.4 per cent last quarter to 3.2 per cent. Since our incomes grew, but we weren’t spending any more than we were in the June quarter, the slice of our pay going towards savings increased.

The saving-to-income ratio is still much lower than the 10 to 20 per cent we were at during the pandemic when the rivers of stimulus payments gushed in, and our spending options were locked down, but it has been climbing back from a low of 1.5 per cent in March last year.

Of course, the money we save ends up sitting idle – at least while it stays in our coffers. We don’t spend it, so it doesn’t flow back into businesses, and doesn’t stimulate the economy to grow.

But our decision to save a lot of the money we got to keep thanks to tax cuts doesn’t explain the slow – but positive – upward crawl of the economy. If households didn’t spend any more than they did in the previous three months, then how did the economy still manage to expand?

A big driver of our economic growth was spending – not by households or businesses – but by the government. It contributed 0.6 percentage points to growth in the three months to September. Part of this was thanks to a pick-up in public investment by state and local governments on infrastructure projects such as roads and renewable projects.

But a big chunk of the government spending was on cost-of-living relief, such as the energy rebates, which basically just shifted what would have been paid by consumers to cook and heat their homes, to the government’s shopping list. It meant overall government spending hit a near-record-high share of the economy at more than 28 per cent.

Since overall economic growth only came in at 0.3 per cent (notably lower than the 0.5 per cent economists had been expecting), government spending made the difference between our economy shrinking and treading water.

There were also other factors with a smaller impact on growth, including a slight uptick in the construction of new homes, which pushed up private investment spending. There was also a fall in inventories (generally stock held by companies) and net overseas trade – as imports fell and exports grew – which contributed 0.1 percentage points to GDP.

Although the economy’s usual star player – households – spent less than expected in the September quarter, there are signs things will pick up in the final three months of the year. For one thing, retail trade picked up 0.6 per cent in October, even before all the major discounts started kicking in last month, coaxing customers (and their wallets) out for Black Friday and Cyber Monday.

So, how does this position the Reserve Bank?

While economic growth and household spending growth are running below its forecasts, the bank has previously said the level of demand – how much we’re spending now as opposed to how fast our spending appetites are growing – is still too high unless we improve how much (or how efficiently) we can produce things.

It’ll take more weakness in spending, or more progress on slamming a lid on inflation, for the Reserve Bank to start cutting rates. So far, Australian households – and their spending – seem stuck in the holding pen.

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How supermarkets get away with raising their prices

 By Millie Muroi, Economics Writer, October 4,2024 

If Coles and Woolies wanted to get away with higher prices, they just had to tell us.

Alright, it’s not that simple. But there is a getaway car for any business wanting to keep customers coming – even after pumping up their prices. False discounting? No. Read on.

The high-inflation environment has sucked for a lot of us: growing grocery bills, surging insurance premiums and higher housing costs, to name a few. But the way we’ve perceived price increases – and the way we’ve responded to them – tell us (and businesses) a lot about how and when they can push prices up without getting customers cross.

Behavioural science consultancy Dectech took a look at the most recent spurt of inflation in the UK and how consumers saw – and changed their behaviour in response to – large price rises. They did their own testing, too, to see whether different justifications given for those pesky price hikes could change the way customers responded.

Now, you might expect customers to behave consistently to a price rise, regardless of the justification given for it. After all, an $8 packet of chips is still sucking more money out of your bank account than a $5 packet, regardless of the reason given for it.

But the thing about behavioural economics is that it often pokes holes in the neat economic models and theories we have in place to explain how we act. The law of demand, for example, states that as prices rise, customers buy less. Most economic models wouldn’t account for the fact that this depends on how companies explain those price hikes.

But the effect of the reasoning given for inflation can be more influential than the inflation itself, according to Dectech. An unexplained price rise, or a price rise for a “bad reason” can have a similar effect on customer behaviour as a 16 percentage point higher price rise for a “good reason”.

So, what’s the difference between “good” and “bad” reasons? Basically, it comes down to whether the price increase seems fair. Of course, this all comes down to perception. But one thing which helps to increase customers’ perceived “price fairness” is understanding how the price for a product was determined.

Despite the law of demand, pointing to increased demand for a price rise is a “bad” reason: it has the biggest negative effect on customer satisfaction and eagerness to buy a product. This is especially the case for a sector like telecommunications where the retailer doesn’t really have significant supply constraints.

By contrast, the best way to fend off angry customers is to either blame it on cost increases which “have to” be passed on, or to say the price increase covers extra costs needed for product development. Essentially, it has to be either something out of a business’s control, or aimed at improving the customer’s experience.

The worst thing a business can do is give no reason at all and hope no one notices (or, as Coles and Woolies have allegedly done, hide those price rises beneath false discounts, eroding customers’ trust). A 20 per cent price rise with the explanation that you’re investing in the product has the same effect on sales as a 4 per cent price rise with no explanation.

Even something as vague as “due to recent circumstances” is better than nothing. Did the dog eat your conveyor belt? Or is it because of a global supply shock? Who knows – but it works because at least the business is showing the decency to own the price increase. Openness and honesty count for something.

Time-poor and lazy

It also depends on the sector. Dectech’s study found raising prices “to invest in the product” worked especially well for the grocery and airline sectors – at least in the UK. Why? “People want to see better ready-made meals and new aeroplanes,” the authors said.

We also know humans aren’t big fans of change. We’re creatures of habit, often preferring to stick to routine or with what we know. Independent Australian economic research institute e61’s economist Matt Elias took a peek into consumer bank transactions linked to store locations and found there was a “persistent degree of inertia” when it comes to our supermarket choices.

Chances are, even if you have multiple options, you stick with one of the big two: Coles or Woolworths. It’s hard to pinpoint why, but Elias says it could reflect the fact that comparing prices between supermarkets can be tricky: there are so many items which are changing in price from week to week.

Consumers are also time-poor and – let’s face it – lazy. How often do you pull up the websites or catalogues of the major supermarkets to optimise your shopping? Probably not as much as you should or could.

Fluffy handcuffs

Brand loyalty can trap consumers, and unfortunately, it can reduce competition, handing more market power to big companies such as Coles and Woolworths. Why? Because when customers refuse to shop around, there’s less pressure on businesses to offer the best prices.

One way to combat this, Elias says, is to set up a government-supported digital price comparison platform, similar to the websites and apps we have to compare fuel prices. When these systems have been set up overseas, they’ve resulted in lower prices.

Loyalty cards or reward apps can worsen customers’ inertia, acting like fluffy handcuffs. They lock in consumers who would otherwise be more inclined to shop around for the best deal by offering enticing rewards for being faithful. Why cut prices when your customers are busy spending at your store to rack up points?

While economists like to assume people are perfect bargain-hunters, helping to keep companies on their toes and prices in check, the reality is blurrier. From inertia to justifications and loyalty cards, our behaviour is shaped by more than price. Being aware of some of what makes us tick (or sit back) can help businesses make money – but it can also help us save it.

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Why the planet needs the economy to go round in circles

By MILLIE MUROI, Economics Writer

For as long as humans have walked the earth, we’ve grappled with this dilemma: how to satisfy our unlimited wants and needs with limited resources. Eventually, people started putting pen to paper, and called the study of this problem “economics.”

Over time, we’ve become better at making – and doing – more: by piecing together machines that can dig more out of the ground, stripping the soil, and producing all sorts of foods, gadgets and shelter. Our ancestors would be shocked walking through the supermarket, and trawling online, at the seemingly infinite choices at our fingertips today.

But all this has come at a cost – which we haven’t been particularly good at factoring in.

For the past few centuries, we’ve measured our success, economically speaking, mostly by how much we’re able to produce. The bigger the amount (often measured by gross domestic product (GDP). the better.

In simply prioritising greater output, though, we’ve been pumping out emissions, producing massive amounts of waste and damaging land and waterways. We’ve been scoring own goals, even as we press forward in this seemingly never-ending game of producing more.

Now, the solution isn’t necessarily to rewind the work we’ve done. But it does pay to look back in time. For many indigenous communities, it has been the case for millennia that people take only what they need, leaving enough for remaining resources to regenerate, and reusing and repairing things rather than tossing them away.

These principles are also at the heart of the concept of a “circular economy”.

Our economy now is mostly “linear”, meaning we tend to take raw materials from the earth, make things out of them, then pretty quickly dispose of them when those things start falling apart. A lot of the valuable materials we take from the land end up buried in landfill or drifting around in the atmosphere or our oceans – which, apart from harming the environment, is a problem when we’re on a planet with limited resources.

Now, most of us have a decent understanding of recycling. You probably divvy-up your hard plastics from your soft plastics, and you might even have a compost bin or worm farm.

Australia’s overall material recycling rate in the 2021–22 period was about 63 per cent – or 1568 kilograms of recycled material for each person, up from 57 per cent in 2011-12. It’s an industry which added roughly $5 billion in value to the Australian economy, more than 30,000 jobs, and paid over $2.5 billion in wages and salaries in 2021-22. And there’s room to grow.

But the circular economy starts long before we decide to toss things out. It’s about designing things in ways that create less waste: from the process of making them (how can we limit by-products like carbon dioxide when building a house, or make a car using less material?) to designing goods that last the distance, or run more efficiently (how can we make T-shirts that hold their shape for years, or planes that run on less fuel and cough out fewer emissions?)

It’s also about a mindset shift – which could actually make us happier. In our consumption-led economy (household spending drives more than half of our economic growth), it’s easy to fall into the trap of buying things. Ads spruiking that thing you really need are everywhere. Whether it’s the newest iPhone, that cute outfit you’ve been eyeing up, or that power tool which will definitely complete your collection, the dopamine hit when you walk away with a new item is a fuzzy feeling many of us are familiar with.

But that excitement tends to wane over time, buyer’s remorse can creep in, and we often end up with a lot of clutter which we compare to other people’s clutter and fall into an endless cycle of sorting through.

Being more conscious about our purchases, buying things that are made sustainably, and thinking about how to extend the life of our possessions, are good places to start. “Buy Nothing” groups where people give away things they no longer need, and repairing things rather than throwing them away, are ways we can save money and feed into this circular economy.

The way we consume things is undeniably a game-changer. But the government and the country’s businesses also have a role. In October 2022, Australia’s environment ministers committed to speeding up the transition to a circular economy by 2030.

This week, the Productivity Commission opened up its desk to submissions for its inquiry into Australia’s opportunities in the circular economy. Requested by Treasurer Jim Chalmers, the inquiry will look into ways Australia can “improve materials productivity and efficiency in ways that benefit the economy and the environment.”

While we’ve tended to fixate on how we can improve the productivity of workers, international studies suggest a more circular economy can lead to higher economic growth and productivity, largely by boosting how productive we are with our inputs: essentially making more with a given amount of raw materials.

Australia has the fourth-lowest rate of materials productivity among OECD countries, generating $US1.20 of economic output for each kilogram of materials we consume. That’s less than half of the OECD benchmark of $US2.50.

Of course, it’s important to remember Australia is a bit of an outlier. We’re a highly resources-driven economy, with vast amounts of land separating us from our cows, sheep, mines and one another. While we can make transport less wasteful, achieving 100 per cent circularity is practically off the table.

Moving towards a more circular economy, though, is a worthwhile exercise – and one we’ve been making progress towards. Our material productivity has increased from $1.45 generated from a kilo of materials in 2010, to nearly $1.60 a kilogram in 2023, and we’re generating a bit less waste per person than we were a couple of decades ago.

Since the industrial revolution, we’ve rapidly fattened up our economy by pumping out products and consuming more. While going around in circles is generally a bad thing, the best way forward might be just that.

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Our economy has turned into a tortoise. The RBA will be pleased

By Millie Muroi, Economics Writer

Most of us know the age-old saying: slow and steady wins the race. Numbers released into the wild on Wednesday show the Australian economy is definitely a tortoise – but it should make the Reserve Bank pretty happy.

The national accounts – data gathered and shared every three months by the Australian Bureau of Statistics – gives us one of the most detailed pictures of how our economy has been tracking. The numbers always run slightly behind where we are because all the information has to be collected, crunched and spat out into a digestible clump. This week’s data drop was for the three months to June.

So, how did we go? There’s not much that should come as a surprise. Economists have long known the economy has been slowing. And most of the household data points to trends you’ve probably seen and lived yourself less spending, less disposable income and less of our income being put away for a rainy day.

Economic growth – or gross domestic product (GDP) – was weak, expanding 0.2 per cent in the June quarter for the third quarter in a row. But economic growth per person, which matters more when assessing our living standards, has tumbled … again. It fell 0.4 per cent – the sixth back-to-back quarter of shrinkage.

Will this worry our decision makers? Probably not. The focus is almost always on the total, not what’s happening on an individual level. It’s also much simpler to talk about GDP than GDP per capita – and much easier to fit in a headline!

The Reserve Bank, for one, won’t be worried by Wednesday’s figures. In fact, it’s probably quite happy. Why? Because its decisions are made at an aggregate level: it looks at the big picture, not the finer details.

There’s always a risk the bank will push the economy too far down the drain.

The bank’s forecasts for certain sections of the national accounts might have fallen on the wrong side of the fence: disposable income (how much people have to spend or save after taxes) for example, came in 0.3 per cent lower over the year, compared with the bank’s expectations for a 1.1 per cent increase.

But the Reserve Bank has one thing at the front of its mind: pushing inflation back into the 2 per cent to 3 per cent target range. In June, annual inflation was still sailing in at 3.8 per cent.

Sure, the bank also wants to keep Australians employed. But with the number of jobs still growing, and the unemployment rate (at least the headline measure) staying low by historical standards, it’s inflation that the bank is worried about.

As you know, inflation is determined by the balance – or imbalance – between demand and supply. There’s not much the Reserve Bank can do about supply (except shout from the sidelines about the importance of boosting productivity), so its focus is on demand.

From the bank’s perspective, it doesn’t matter where that demand comes from, or who exactly is doing the demanding. Its mission is to dampen demand when inflation is high, and give it a boost when inflation is low and the economy is slow.

There’s always a risk the bank will push the economy too far down the drain. We know GDP is only just managing to keep pace and the Reserve Bank has one tool – interest rates – which it’s not afraid of holding high until there’s a clearer sign it has inflation under its thumb.

After all, it doesn’t want inflation running high and finishing first, unless finishing means an end to high inflation.

For this to happen, the bank needs demand to slow down. That means less spending – at least until we figure out a way to pump out more goods and services with the limited people, machinery and materials we have.

It’s clear households are feeling more pressure. The proportion of households’ income that they were able to save dropped to 0.6 per cent in the June quarter, compared with 1.7 per cent at the same time last year. That’s despite households also cutting their spending.

Household consumption, at more than half of GDP, is the single biggest driver of economic growth. But with household spending down, it was government spending (which contributed 0.3 percentage points to growth) that helped keep the economy expanding. Investment spending on new homes, business equipment and building had no impact this time around, while net trade (the difference between exports and imports) contributed 0.2 percentage points, largely thanks to international students and all the spending they did in our economy.

Overall, there’s little in the national accounts to spook the Reserve Bank. Treasurer Jim Chalmers copped some heat this week for a tweak in his language when he said interest rates were “smashing” the economy. But Chalmers and the bank know that without a miracle or a slowing economy, it’s hard to see inflation being reined in anytime soon.

If anything, the national accounts show the economy is moving the way the bank wants. That means both an interest rate cut and rise are unlikely for the time being. The Reserve Bank doesn’t want the economy to stall, but it needs any increase in demand to run behind growth in supply, for inflation to come down.

Right now, our country is still running too hard down the shopping aisle for suppliers to keep up, meaning we’re putting upwards pressure on prices. That’s where the government needs to strike a fine balance. Spend too little and, as our figures showed, we could slip into recession. But spend too much and inflation could stick around for longer.

Anyone who runs knows it’s impossible to sprint all the time. Going slow is not always fun, but until we build up the stamina, muscle and skill, we have to make sure not to push ourselves too hard for too long in case we sustain an injury.

It’s a similar story for the economy. The demands we put on it have to grow alongside our ability to cater for them. The Reserve Bank is like a coach making tough calls because it thinks we’re pushing too hard.

Our economy is slowing, and it’s a fine balance to strike when jobs are on the line. But as long as we’re not running backwards, and with the jobs market so strong, the bank will be happy to stay the course with our tortoise economy.

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Think you've snagged a bargain online? It's you who's been snagged

By Millie Muroi, Economics Writer 

In a cost-of-living crisis, I’m sure I’m not the only bargain hunter who has put giant e-commerce sites Temu, Shein and Wish to the test.

I’ve heard all the arguments against shopping online, and like most of my generation, I’ve shrugged off most of them, too. It’s how we do things when money is tight. Get with the program, or get old.

One friend splashed cash on a giant stuffed pig from Temu for my birthday, and another told me their “mate” (sure, sure) had tried buying some “weird stuff” from Wish, including weapons and sex toys. By weapons, they meant pepper spray. I didn’t press on the sex toys.

“Verdict?” I asked. “Worth someone switching suppliers?”

“Feel free to trust the online reviews,” they replied. “I can’t speak for it myself.”

You might think you’ve bagged a bargain, or something you wouldn’t buy in person, when using these sites. And in some cases, you probably have. But whether you’re stocking up on knock-off essentials, or chasing a quick hit of retail therapy, there are some risks to keep in mind.

First, there’s the good chance you’re spending more than you bargained for. Sneaky sales tactics have been used by bricks-and-mortar shops for decades. Switching up the floor plan every few weeks or months, for example, forces customers to spend more time in the store and discover products they may not have noticed before on their well-worn path.

But online shopping is a different ball game, and has ushered in a raft of new sneaky techniques. One of these strategies is gamification: where e-commerce sites turn shopping into a game-like experience. Hop onto Temu, for example, and you might mistake it for an online casino.

Timers count down how long you have before you’ll miss out on a deal. And when a roulette wheel of discounts and store credit pops up with tantalising rewards (and seemingly no possibility of losing), it would seem silly not to give it a shot, right?

The dopamine hit from activities like spinning a wheel and landing a discount help reel us in, keep us engaged, and get us invested in making use of our reward, which, of course, means spending. The countdowns, meanwhile, fuel a sense of scarcity and urgency which compel us to act now (often impulsively), rather than abandon our cart.

Gamification, of course, is not just an online phenomenon. McDonald’s, for instance, runs its Monopoly promotion every year, encouraging customers to collect tokens, some of which can be exchanged instantly in-store for discounts.

But there are few e-commerce sites which have used these tactics so heavily, and converted so many people into customers. Despite only launching in 2022, Temu has become the fifth most popular online retail brand in Australia, with an estimated 1.2 million Australians checking out on the platform, and $1.3 billion spent by them annually.

Of course, part of this comes from the hundreds of millions of dollars the company has splashed each year on advertising. This includes money spent to flood social media platforms with ads and, in the US, even a spot at the most sought-after marketing opportunity: the Super Bowl.

Since Temu’s debut, its Chinese parent company Pinduoduo has seemingly gone from strength to strength. In the first three months of this year, it raked in nearly $5.4 billion in profit, triple its earnings from the same period last year.

Apart from its mammoth marketing budget, Temu has probably also benefited from launching at a time when inflation pressures, especially across developed economies, have driven customers to intensify their hunt for bargains.

Amazon, the US behemoth which launched back in 1994 as an online bookstore, still holds the top spot in e-commerce when it comes to profits and sales globally. But companies such as Temu have come under particular scrutiny because of a Chinese intelligence law which allows Beijing to access sensitive information held by Chinese firms.

While information on the $2 phone case you bought from Temu might not be too consequential, there are suspicions the Chinese government could be accessing personal information which could expose customers to fraud or cyberattacks.

And while misbehaviour by multinationals isn’t an issue unique to Chinese companies, regulation and compliance in China can be looser. Temu, for instance, has been accused of selling products built with slave labour. And authorities in Seoul this month found women’s accessories sold by companies including Shein, Temu and AliExpress contained toxic substances, some at hundreds of times above the legal limit.

There are also wider economic implications of shopping with these platforms. A tactic often used by new companies is to temporarily sell at loss-making prices; that is, they sell their goods for less than it costs to make and ship them.

It can’t be done forever, but businesses with money to burn can use these aggressive strategies to drive smaller competitors into the ground or steal customers away from bigger rivals. Consumers benefit, for a little while, from cheaper prices, but competing businesses may suffer and so, eventually, will consumers.

Then, there’s the issue of sharing data. The internet has made it easier for companies to collect personal and minute behavioural information at an unprecedented scale.

While this can be beneficial when companies can match you with products you actually need, at prices that can’t be beaten, it can also help them take advantage of our weaknesses and play to our psychology in ways that make us spend more than we should.

There’s little doubt heavy use of gamification on sites such as Temu is already hooking us in. But by engaging with these tactics in the first place, we’re also feeding into the algorithms they use, and helping these companies figure out what makes us tick.

Temu’s tagline is “shop like a billionaire”, but unless we stay alert to the risks and tactics used by these e-commerce giants, it will be their pockets we end up lining.

While new and competitive businesses are a good thing for consumers looking for a bargain, we should keep a careful eye on these firms. After all, they’re keeping a close watch on ours.

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There's a good case for cutting interest rates ASAP

What a difference a number makes. For weeks, the money market’s macho men had been telling us interest rates needed to rise yet further to ensure inflation would keep falling. But last week, their case went up in smoke and now almost no one thinks the Reserve Bank board will do anything at its two-day meeting starting today.

The weeks of idle speculation came to an end when finally we saw the consumer price index for the June quarter. It showed underlying inflation falling to 3.9 per cent.

So, sighs of relief all round. But why had we allowed these misguided souls to cause us so much angst? Why had their intimations of death and destruction been given so much air time?

Short answer: because we find bad news more interesting than good news. But as last week’s abrupt turnaround reminds us, the bad news ain’t necessarily so. So maybe we should give a hearing to those urging the Reserve to do something nice rather than nasty.

Let me tell you about a briefing note from the economists at the Australian Council of Social Service, who remind the Reserve that its much-remarked “narrow path” to lower inflation without triggering a recession and high unemployment is narrow “because it’s rare for interest rate hikes of this scale and intensity not to trigger a serious economic downturn”.

The peak welfare organisation says the process of reducing demand and lowering inflation is already well under way and, since increases in official interest rates take up to two years to flow through to inflation and unemployment, it has called for the Reserve to start reducing interest rates immediately.

Those who focus on the slowdown in the fall of the inflation rate and conclude there’s a need for further tightening have failed to see how sharply job opportunities and living standards have fallen, even without a recession.

The council examines the data for the two years since the Reserve began increasing interest rates, from June 2022 to June 2024, and it finds a lot more evidence of downturn and pain than you may realise.

For a start, the number of vacancies for entry-level jobs has declined by almost a third. There are an additional 100,000 people unemployed, and almost as many extra people suffering underemployment (unable to find as many hours of work as they want).

If you know employment is still growing, get this: this has occurred only because of stronger growth in publicly funded jobs (particularly under the National Disability Insurance Scheme). The annual number of publicly funded jobs has grown from 210,000 to 326,000, whereas jobs growth in the market sector has collapsed from 321,000 a year to 6000 a year.

If interest rates stay high, jobs in the market sector are likely to decline, but the present growth in publicly funded jobs won’t last.

We have avoided a recession – an economy that’s getting smaller – so far only because of the surprisingly strong bounce-back in immigration since the reopening of our borders. This won’t continue.

But the real value of goods and services produced per person has been falling, meaning that living standards have been falling. Over the two years, average real income per person has fallen by 8 per cent, or about $5000 a year.

According to the council’s calculations, the stage 3 tax cuts, the energy rebate and increased rent allowance for people on pensions or benefits announced in the May budget will restore only about a fifth of this loss of real income to households.

So the macho men’s fear that the budget measures will add to inflation pressure is laughable. And the council doesn’t miss the opportunity to remind us that JobSeeker unemployment benefits remain a miserly $55 a day.

As for the macho men’s fear that a “price-wage spiral” could take off at any moment, the council says average wages have fallen by 2 per cent since June 2022, after adjusting for inflation.

Wages have started rising a fraction faster than inflation, but it will take many moons to make up that gap. Meanwhile, the collapse in consumer spending has been “precipitous”: a fall of 10 per cent in real spending per person since June 2022.

If the Reserve’s renewed commitment to maintaining full employment is to have any meaning, it will need to start cutting the official interest rate ASAP.

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Interest rate speculators should get back in their box

There’s nothing the financial markets and the media enjoy more than speculating about the future of interest rates. And with last week’s news that consumer prices rose by 4 per cent over the year to May, they’re having a field day.

Trouble is, the two sides of the peanut gallery tend to egg each other on. They have similar ulterior motives: the money market players lay bets on what will happen, while the media can’t resist a good scare story – even one that turns out to have scared their customers unnecessarily, thus eroding their credibility.

But the more the two sides work themselves up, the greater the risk they create such strong expectations of a rate rise that the Reserve Bank fears it will lose credibility as an inflation fighter unless it acts on those expectations.

Fortunately, the Reserve’s newly imported deputy governor, Andrew Hauser, has put the speculators back in their box with his statement that “it would be a bad mistake to set policy on the basis of one number, and we don’t intend to do that”.

He added that there was “a lot to reflect on” before the Reserve board next meets to decide interest rates early next month. Just so. So, let’s move from idle speculation to reflection.

For a start, we should reflect on the wisdom of the relatively recent decision to supplement the quarterly figures for the consumer price index with monthly figures.

This has proved an expensive disaster, having added at least as much “noise” as “signal” to the public debate about what’s happening to inflation. Why? Because many of the prices the index includes aren’t actually measured monthly.

Many are measured quarterly, and some only annually. In consequence, the monthly results can be quite misleading. Do you realise that, at a time when we’re supposedly so worried that prices are rising so strongly, every so often the monthly figures tell us prices overall have fallen during the month?

In an ideal world, the people managing the macroeconomy need as much statistical information as possible, as frequently as possible. But in the hugely imperfect world we live in, paying good taxpayers’ money to produce such dodgy numbers just encourages the speculators to run around fearing the sky is falling.

The Reserve has made it clear it’s only the less-unreliable quarterly figures it takes seriously but, as last week reminded us, that hasn’t stopped the people who make their living from speculation.

The next thing we need to reflect on is that our one great benefit from the pandemic – our accidental return to full employment after 50 years wandering in the wilderness – has changed the way our economy works.

I think what’s worrying a lot of the people urging further increases in interest rates is that, as yet, they’re not seeing the amount of blood on the street they’re used to seeing. Why is total employment still increasing? Why isn’t unemployment shooting up?

One part of the answer is that net overseas migration is still being affected by the post-pandemic reopening of our borders – especially as it affects overseas students – which means our population has been growing a lot faster than has been usual after more than a year of economic slowdown.

But the other reason the labour market remains relatively strong is our return to full employment and, in particular, the now-passed period of “over-full employment” – with job vacancies far exceeding the number of unemployed workers.

With the shortage of skilled workers still so fresh in their mind, it should be no surprise that employers aren’t rushing to lay off workers the way they did in earlier downturns. As we saw during the global financial crisis of 2008-09, they prefer to reduce hours rather than bodies.

It’s the changing shares of full-time and part-time workers – and thus the rising rate of underemployment – that become the better indicators of labour market slack in a fully employed economy.

The other thing to remember is the Albanese government’s resolve not to let the ups and downs of the business cycle stop us from staying close to the full employment all economists profess to accept as the goal macroeconomic management.

This resolve is reflected in the Reserve Bank review committee’s recommendation that the goal of full employment be given equal status with price stability, which the Reserve professes to have accepted.

This doesn’t mean the business cycle has been abolished, nor that the rate of unemployment must never be allowed to rise during a period in which we’re seeking to regain control over inflation.

What it does mean is that we can’t return to the many decades where the commitment to full employment was merely nominal, and central banks and their urgers found it easier to meet their inflation targets by running the economy with permanently high unemployment.

The financial markets may persist in their view that high inflation matters and high unemployment doesn’t, but that shouldn’t leave them surprised and dissatisfied with a central bank that’s not whacking up interest rates with the gay abandon they’ve seen in previous episodes.

But there’s one further issue to reflect on. It’s former Reserve Bank governor Dr Philip Lowe’s prediction in late 2022 that we’d be seeing “developments that are likely to create more variability in inflation than we have become used to”. As someone put it: shock after shock after stock.

The point is, it’s all very well for people to say we should keep raising interest rates until the inflation rate is down to 2 per cent or so, but what if price rises are being caused by problems on the supply (production) side of the economy, not by excessive demand?

High interest rates have already demonstrated their ability to end excessive demand, as quarter after quarter of weak consumer spending, and a collapse in the rate of household saving, bear witness. But if high prices are coming from factors other than excess demand, there’s nothing an increase in interest rates can do to fix the problem.

What surprises me is how little attention market economists have been paying to what’s causing the seeming end to the inflation rate’s fall to the target range.

Look at the big price increases that have contributed most to the 4 per cent rise over the year to May – in rents, newly built homes, petrol, insurance, alcohol and tobacco – and what you don’t see is booming demand.

Right now, all we can do to push inflation down is attempt to hide the effect of supply-side problems on the price index by putting the economy into such a deep recession that other prices are actually falling.

This was never a sensible idea, and it’s now ruled out by the government and the Reserve’s commitment never to stray too far from full employment.

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No one's sure what's happening in the economy

Treasury secretary Dr Steven Kennedy let something slip when he addressed a meeting of business economists last week. He said it was too early to say if the economy was back in a more normal period, “perhaps because no one is quite sure what normal is any more”.

This was especially because “unusual economic outcomes are persisting,” he added.

Actually, anyone in his audience could have said the same thing – but they didn’t, perhaps because they lacked the authority of the “secretary to the Treasury”.

No, standard practice among business economists and others in the money market is to make all predictions with an air of great certainty. Forgive my cynicism, but this may be because their certain opinion changes so often.

Often, it changes because something unexpected has happened in the US economy. Many people working in our money market save themselves research and thinking time by assuming our economy is just a delayed echo of whatever’s happening in America.

If Wall Street has decided that America’s return to a low rate of inflation has been delayed by prices becoming “sticky”, rest assured it won’t be long before our prices are judged to have become sticky as well.

But predicting the next move in either economy has become harder than we’re used to. Kennedy noted in his speech that, in recent years, the global economy, including us, had been buffeted by shared shocks, such as a global pandemic, disruptions to the supply of various goods, and war.

One factor I’d add to that list is the increasing incidence of prices being disrupted by the effects of climate change, particularly extreme weather events, but also our belated realisation that building so many houses on the flood plain of rivers wasn’t such a smart idea.

All these many “shocks” to the economy have knocked it from pillar to post, and stopped it behaving as predictably as it used to. But, as we’ll see, not all the shocks have been adverse.

Right now, the change everyone’s trying to predict is the Reserve Bank’s next move in its official interest rate, which most people hope will be downward.

Normally, that would happen just as soon as the Reserve became confident the inflation rate was on its way down into the 2 to 3 per cent target range. And normally, we could be confident the first downward move would be followed by many more.

But since, like Kennedy, the Reserve is not quite sure what normal is, and Reserve governor Michele Bullock says she expects the return to target to be “bumpy”, it may delay cutting rates until inflation is actually in the target zone.

If so, and remembering that monetary policy, that is, interest rates, affects the economy with a “long and variable lag”, the Reserve will be running the risk that it ends up hitting the economy too hard, and causing a “hard landing” aka a recession, in which the rate of unemployment jumps by a lot more than 1 percentage point.

Kennedy was at pains to point out that the rise in the official interest rate of 4.25 percentage points over 18 months is the “sharpest tightening” of the interest-rate screws since inflation targeting was introduced in the early 1990s.

He also reminded us how much help the Reserve’s had from the Albanese government’s fiscal policy, which has been “tightened at a record pace”. Measured as a proportion of gross domestic product, the budget balance has improved by about 7 percentage points since the pandemic trough. Add the states’ budgets and that becomes 7.5 percentage points.

That’s a part of the story those in the money market are inclined to underrate, if not forget entirely. Kennedy reminded them that, since 2021, our combined federal and state budget balance has improved by more than 5 percentage points of GDP. This compares with the advanced economies’ improvement of only about 1.5 percentage points.

So, has our double, fiscal as well as monetary, tightening had much effect in slowing the growth of demand for goods and services and so reducing inflationary pressure?

Well, Kennedy noted that, over the year to December, households’ consumption spending was essentially flat. And consumer spending per person actually fell by more than 2 per cent.

When you remember that consumer spending accounts for more than half total economic activity, this tells us we’ve had huge success in killing off inflationary pressure. And this week, when we see the national accounts for the March quarter, they’re likely to confirm another quarter of very weak demand.

So, everything’s going as we need it to? Well, no, not quite.

Last week we learnt that, according to the new monthly measure of consumer prices, the annual inflation rate has risen a fraction from 3.4 to 3.6 per cent over the four months to April.

“Oh no. What did I tell you? The inflation rate’s stopped falling because prices are “sticky”. It’s not working. Maybe we need to raise interest rates further. Certainly, we must keep them high for months and months yet, just to be certain sure inflation pressure’s abating.”

Well, maybe, but I doubt it. My guess is that a big reason money market-types are so twitchy about the likely success of our efforts to get inflation back under control is the lack of blood on the streets that we’re used to seeing at times like this.

Why isn’t employment falling? Why isn’t unemployment shooting up? Why are we only just now starting to see news of workers being laid off at this place and that?

It’s true. The rate of unemployment got down to 3.5 per cent and, so far, has risen only to 4.1 per cent. Where’s all the blood? Surely, it means we haven’t tightened hard enough and must keep the pain on for much longer?

But get this. What I suspect is secretly worrying the money market-types, is something Kennedy is pleased and proud about.

“One of the achievements of recent years has been sustained low rates of unemployment,” he said last week. “The unemployment rate has averaged 3.7 per cent over the past two years, compared with 5.5 per cent over the five years prior to the pandemic.”

Our employment growth has been stronger than any major advanced economy over the past two years, he said. Employment has grown, even after accounting for population growth.

And we’ve seen significant improvements for those who typically find it harder to find a job. Youth unemployment is 2.6 percentage points lower than it was immediately before the pandemic.

So, what I suspect the money market’s tough guys see as a sign that we haven’t yet experienced enough pain, the boss of Treasury sees as a respect in which all the shocks that have buffeted us in recent times have left us with an economy that now works better than it used to.

And Kennedy has a message for the Reserve Bank and all its urgers in the money market.

“It is important to lock in as many of the labour market gains as we can from recent years. This involves macroeconomic policy aiming to keep employment near its maximum sustainable level consistent with low and stable inflation,” he said.

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Are the supermarket twins too keen to raise their prices?

The cost-of-living crisis has left many convinced the two big supermarket chains – known to some as Colesworth – have been “price gouging” – raising their prices without justification. “Gouging” is a rude, pejorative phrase that would never cross an economist’s lips (nor mine), but economic theory does say that, when an industry is dominated by just a few huge companies, this will give them the power to manipulate prices to their own advantage.

But anecdotes and even economic theory are one thing, hard evidence is another. And knowing what to do about it is a third. So it’s good that last Friday, Treasurer Jim Chalmers launched a full inquiry into supermarket prices by the Australian Competition and Consumer Commission. Chalmers said this was “about making our supermarkets as competitive as they can be so Australians get the best prices possible”.

The inquiry, which will take a year, will include an examination of online shopping, the effects of loyalty programs and how advances in technology are affecting competition.

The competition watchdog’s chair, Gina Cass-Gottlieb, said the commission will use its compulsory information-gathering powers to collect financial details from the supermarket giants.

The government has also commissioned a former Labor minister and economist, Dr Craig Emerson, to review the effectiveness of the “food and grocery code of conduct”, introduced in 2015 to stop the big supermarkets from using their buying power to extract unreasonably low prices from their suppliers, particularly farmers.

The code is voluntary and has no way of punishing bad behaviour, so hasn’t worked well. It’s drawn few complaints from suppliers, probably because they’re afraid of retaliation by Colesworth. Only if it’s made compulsory and given teeth is it likely to improve the farmers’ lot.

Our groceries market is one of the most concentrated in the developed world. Woolworths has 37 per cent of the market and Coles has 28 per cent, leaving Aldi with 10 per cent and Metcash (wholesaler to IGA stores) with 7 per cent. So our two giants’ combined share of 65 per cent compares with Britain’s top two’s share of 43 per cent. In the United States, the four largest chains make up just 34 per cent of the market.

While we wait for the competition watchdog’s report, what do we know about the chains’ behaviour?

The report of an unofficial inquiry into price gouging and unfair pricing practices, commissioned by the ACTU from a former competition commission chair, Professor Allan Fels, will be published on Wednesday.

But we know from a letter Fels sent to Chalmers last month what it will say about supermarkets. Fels said the inquiry had been inundated with concerns from experts and regular Australians alike on the prices set by the chains.

Fels found that neither Coles nor Woolworths suffered declines in profit during the pandemic because their services had been deemed essential. Since then, however, both have increased their profit margins, thanks to weak competition and their ability to delay passing on any cost reductions.

Fels noted that high prices, including co-ordinated price increases between the two, aren’t actually prohibited by competition law, except where there is unlawful communication or agreement between the firms. (Which, of course, doesn’t prohibit tacit collusion.)

Duopolies have a mutual incentive not to decrease prices where possible, Fels said, particularly on those goods whose prices are closely watched by customers.

“There has not been a price war between the major supermarkets in some years,” he said. This contrasts with the British experience, where Tesco and Sainsbury’s entered an aggressive price war with Aldi.

Here, the entrance of Aldi has been helped by outlawing the ability of the big two to do deals with shopping centre owners preventing rival supermarkets from setting up. Fels said he shared the watchdog’s concern about the big two’s ability to limit competition by engaging in “land banking” – hoarding supermarket sites, so rival companies can’t get a foothold.

Fels worries also about the giants playing “rockets and feathers”. When their costs rise, their prices go up like a rocket, but when their costs fall, their prices drift slowly down like a feather.

Fels found that, as prices have increased, consumers had noticed again and again that once-normal prices were being advertised back to shoppers as “special”.

He quoted one submission to his inquiry asserting that, until August 2022, Coles and Woolies sold a 200-gram jar of Timms coffee for $8. Then Coles increased the shelf price to $12.70 before, a couple of weeks later, reducing the price to $10.70 with a tag saying “was $12.70 per bottle, now ‘down, down!’.”

Another submission asserted that Devondale cheese had gone from $5 to $10 in recent months, but had then been on “special” for $10.

Cass-Gottlieb has said the commission was “carefully looking” at claims that some discounts amounted to deceptive conduct. She also said it was concerned by “was, now pricing”, which might be outlawed.

If all the pain of the cost-of-living crisis at last prompts this government to get tough with the game-playing supermarkets, it will be some consolation.

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Jury still out on how much hip pocket pain still coming our way

It’s not yet clear whether the Reserve Bank’s efforts to limit inflation will end up pushing the economy into recession. But it is clear that workers and their households will continue having to pay the price for problems they didn’t cause.

Prime Minister Anthony Albanese didn’t cause them either. But he and his government are likely to cop much voter anger should the squeeze on households’ incomes reach the point where many workers lose their jobs.

And he’ll have contributed to his fate should he continue with his apparent intention to leave the stage-three income tax cuts in their present, grossly unfair form.

The good news is that we’re due to get huge hip pocket relief via the tax cuts due next July. The bad news is that the savings will be small for most workers, but huge – $170 a week – for high-income earners who’ve suffered little from the squeeze on living costs.

Should Albanese fail to rejig the tax cuts to make them fairer, you can bet Peter Dutton will be the first to point this out. But he’ll need to be quick to beat the Greens to saying it.

Those possibilities are for next year, however. What we learnt this week is how the economy fared over the three months to the end of June. The Australian Bureau of Statistics’ “national accounts” show it continuing just to limp along.

Real gross domestic product – the value of the nation’s production of goods and services – grew by only 0.4 per cent – the same as it grew in the previous, March quarter. Looking back, this means annual growth slowed from 2.4 per cent to 2.1 per cent.

If you know that annual growth usually averages about 2.5 per cent, that doesn’t sound too bad. But if you take a more up-to-date view, the economy’s been growing at an annualised (made annual) rate of about 1.6 per cent for the past six months. That’s just limping along.

And it’s not as good as it looks. More than all the 0.4 per cent growth in GDP during the June quarter was explained by the 0.7 per cent growth in the population as immigration recovers.

So when you allow for population growth, you find that GDP per person actually fell by 0.3 per cent. The same was true in the previous quarter – hence all the people saying we’re suffering a “per capita recession”.

As my colleague Shane Wright so aptly puts it, the economic pie is still growing but, with more people to share it, the slices are thinner.

It’s possible that continuing population growth will stop GDP from actually contracting, helping conceal from the headline writers how tough so many households are faring.

But the media’s notion that we’re not in recession unless GDP falls for two quarters in a row has always been silly. What makes recessions such terrible things is not what happens to GDP, but what happens to workers’ jobs.

It’s when unemployment starts shooting up – because workers are being laid off and because young people finishing their education can’t find their first proper job – that you know you’re in recession.

In the month of July, the rate of unemployment ticked up from 3.5 per cent to 3.7 per cent, leaving an extra 35,000 people out of a job. If we see a lot more of that, there will be no doubt we’re in recession.

But why has the economy’s growth become so weak? Because households account for about half the total spending in the economy, and they’ve slashed how much they spend.

Although consumer spending grew by 0.8 per cent in the September quarter of last year, in each of the following two quarters it grew by just 0.3 per cent, and in the June quarter it slowed to a mere 0.1 per cent.

Households’ disposable (after-tax) income rose by 1.1 per during the latest quarter but, after allowing for inflation, it actually fell by 0.2 per cent – by no means the first quarter it’s done so.

What’s more, it fell even though more people were working more hours than ever before. People worked 6.8 per cent more hours than a year earlier.

So why did real disposable income fall? Because consumer prices rose faster than wage rates did. Over the year to June, prices rose by 6 per cent, whereas wage rates rose by 3.6 per cent.

Understandably, people make a big fuss over the way households with big mortgages have been squeezed by the huge rise in interest rates. But they say a lot less about the way those same households plus the far greater number of working households without mortgages have been squeezed a second way: by their wage rates failing to rise in line with prices.​

This is why I say the nation’s households are paying the price for fixing an inflation problem they didn’t cause. It’s the nation’s businesses that put up their prices by a lot more than they’ve been prepared to raise their wage rates.

Businesses have acted to protect their profits and – in more than a few cases – actually increase their rate of profitability. In the process, they risk maiming the golden geese (aka customers) that lay the golden eggs they so greatly covet.

If you think that’s unfair, you’re right – it is. But that’s the way governments and central banks have long gone about controlling inflation once it’s got away. It was easier for them to justify in the olden days – late last century – when it was often the unions that caused the problem by extracting excessive wage rises.

But those days are long gone. These days, evidence is accumulating that the underlying problem is the increased pricing power so many of our big businesses have acquired as they’ve been allowed to take over their competitors and prevent new businesses from entering their industry.

The name Qantas springs to mind for some reason, but I’m sure I could think of others.

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Don't be so sure we'll soon have inflation back to normal

Right now, we’re focused on getting inflation back under control and on the pain it’s causing. But it’s started slowing, with luck we’ll avoid a recession, and before long the cost of living won’t be such a worry. All will be back to normal. Is that what you think? Don’t be so sure.

There are reasons to expect that various factors will be disrupting the economy and causing prices to jump, making it hard for the Reserve Bank to keep inflation steady in its 2 per cent to 3 per cent target range.

Departing RBA governor Dr Philip Lowe warned about this late last year, and the Nobel Laureate Michael Spence, of Stanford University, has given a similar warning.

A big part of the recent surge in prices came from disruptions caused by the pandemic and the invasion of Ukraine. Such disruptions to the supply (production) side of the economy are unusual.

But Lowe and Spence warn that they’re likely to become much more common.

For about the past three decades, it was relatively easy for the Reserve and other rich-country central banks to keep the rate of inflation low and reasonably stable.

You could assume that the supply side of the economy was just sitting in the background, producing a few percentage points more goods and services each year, in line with the growth in the working population, business investment and productivity improvement.

So it was just a matter of using interest rates to manage the demand for goods and services through the undulations of the business cycle.

When households’ demand grew a bit faster than the growth in supply, you raised interest rates to discourage spending. When households’ demand was weaker than supply, you cut interest rates to encourage spending.

It was all so easy that central banks congratulated themselves for the mastery with which they’d been able to keep things on an even keel.

In truth, they were getting more help than they knew from a structural change – the growing globalisation of the world’s economies as reduced barriers to trade and foreign investment increased the trade and money flows between the developed and developing economies.

The steady growth in trade in raw materials, components and manufactured goods added to the production capacity available to the rich economies. Oversimplifying, China (and, in truth, the many emerging economies it traded with) became the global centre of manufacturing.

This huge increase in the world’s production capacity – supply – kept downward pressure on the prices of goods around the world, thus making it easy to keep inflation low.

Over time, however – and rightly so – the spare capacity was reduced as the workers in developing countries became better paid and able to consume a bigger share of world production.

Then came the pandemic and its almost instantaneous spread around the world – itself a product of globalisation. But no sooner did the threat from the virus recede than we – and the other rich countries – were hit by the worst bout of inflation in 30 years or so.

Why? Ostensibly, because of the pandemic and the consequences of our efforts to limit the spread of the virus by locking down the economy.

People all over the world, locked in their homes, spent like mad on goods they could buy online. Pretty soon there was a shortage of many goods, and a shortage of ships and shipping containers to move those goods from where they were made to where the customers were.

Then there were the price rises caused by Russia’s war on Ukraine and by the rich economies’ trade sanctions on Russia’s oil and gas. So, unusually, disruptions to supply – temporary, we hope – are a big part of the recent inflation surge.

But, the central bankers insist, the excessive zeal with which we used government spending and interest-rate cuts to protect the economy and employment during the lockdowns has left us also with excess demand for goods and services.

Not to worry. The budget surplus and dramatic reversal of interest rates will soon fix that. Whatever damage we end up doing to households, workers and businesses, demand will be back in its box and not pushing up prices.

Which brings us to the point. It’s clear to Lowe, Spence and others that disruptions to the supply side of the economy won’t be going away.

For a start, the process of globalisation, which did so much to keep inflation low, is now reversing. The disruption to supply chains during the pandemic is prompting countries to move to arrangements that are more flexible, but more costly.

The United States’ rivalry with China, and the increasing imposition of trade sanctions on countries of whose behaviour we disapprove, may move us in the direction of trading with countries we like, not those offering the best deal. If so, the costs of supply increase.

Next, the ageing of the population, which is continuing in the rich countries and spreading to China and elsewhere. This reduction in the share of the population of working age reduces the supply of people able to produce goods and services while the demand for goods and services keeps growing. Result: another source of upward pressure on prices.

And not forgetting climate change. One source of higher prices will be hiccups in the transition to renewable energy. No new coal and gas-fired power stations are being built, but the existing generators may wear out before we’ve got enough renewable energy, battery storage and expanded grid to take their place.

More directly, the greater frequency of extreme weather events is already regularly disrupting the production of fruit and vegetables, sending prices shooting up.

Drought prompts graziers to send more animals to market, causing meat prices to fall, but when the drought breaks, and they start rebuilding their herds, prices shoot up.

Put this together and it suggests we’ll have the supply side exerting steady underlying – “structural” – pressure on prices, as well as frequent adverse shocks to supply. Keeping inflation in the target range is likely to be a continuing struggle.

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Economy close to stalling, as Reserve hits the brakes yet again

It’s been a puzzling week, as we learnt the economy had slowed almost to stalling speed, just a day after the Reserve Bank raised interest rates for the 12th time, and warned there may be more.

According to the Australian Bureau of Statistics’ “national accounts”, real gross domestic product – the economy’s production of goods and services – grew by just 0.2 per cent over the three months to the end of March.

That took growth over the year to March down to 2.3 per cent, which sounds better than it is because the economy has slowed so rapidly. If it continued growing by 0.2 per cent a quarter, that would be annual growth of 0.8 per cent.

And the resumption of immigration means the population is now growing faster than the economy. Allow for population growth and GDP per person actually fell by 0.2 per cent. Over the year to March, it grew by only 0.3 per cent.

While a growing population is good for businesses – they have more potential customers – to everyone else, economic growth has been sold to us as raising our material standard of living. Not much chance of that if GDP per person is falling.

The Reserve Bank has been trying to slow the economy down because demand for goods and services has been growing faster than the economy’s ability to supply them, thus allowing businesses to increase their prices.

With additional help from the rising prices of imported goods and services, the rate of inflation has shot up. It’s started falling back from its peak of 7.8 per cent at the end of last year, but is still way above the Reserve’s 2 per cent to 3 per cent target range.

The Reserve’s been raising the interest rates paid by the third of households with mortgages, to reduce their ability to spend on other things. But, at this stage, probably the biggest dampener on consumer spending is coming from the failure of wages to keep up with rising prices.

“Demand” means spending, so if households find it harder to spend on goods and services, that makes it harder for businesses to raise their prices, thus bringing the inflation rate back down.

And remember that the full effect of all the interest rate rises we’ve seen is still to be felt. The pain will increase over the rest of this year.

But if I were Reserve Bank governor Dr Philip Lowe, I wouldn’t be too worried that the plan wasn’t working. The biggest single factor driving GDP is consumer spending, which accounts for more than half of all spending. In the June quarter last year, it grew by 2.2 per cent.

The following quarter its growth fell to 0.8 per cent, then 0.3 per cent, and now 0.2 per cent. Wow. I think the squeeze is working.

Although more people have been working more hours, real household disposable income fell by 0.3 per cent in the quarter, and by 4 per cent over the year to March.

It was hit by the failure of wages to rise in line with prices, by the doubling in households’ interest payments, and by the bigger bite that income tax took out of pay rises, caused by bracket creep.

How did households manage to keep their consumption spending growing despite their falling real income? By cutting the proportion of their income that they were saving from more than 11 per cent in March quarter last year to less than 4 per cent this March quarter – the lowest it’s been in about 15 years.

Household investment spending on newly built homes and alterations fell by 1.2 per cent, its sixth fall in seven quarters.

One bright spot was growth in business spending during the quarter of 2.9 per cent, led by spending on machinery and equipment, and non-dwelling construction – particularly on renewables and electricity infrastructure.

Unfortunately, much of the machinery investment was on imported equipment that had been delayed by the pandemic, so it’s not a sign of continuing strength. The volume of spending on imports was a super-strong 3.2 per cent, but imports subtract from GDP, of course.

Treasurer Jim Chalmers always blames the economy’s slowdown on higher interest rates (blame the Reserve, not me), high inflation (not me either) and “a slowing global economy” (blame the rest of the world).

A slowing global economy? Yes, of course. Everyone’s heard about that. Trouble is, the main way the rest of the world affects us is by buying – or not buying – our exports. And the volume of our exports grew by 1.8 per cent in the March quarter, and 10.8 per cent over the year to March. That’s because our miners have done so well (and our fossil-fuel-using households and businesses so badly) out of the higher world coal and gas prices caused by the Ukraine war.

Even so, this quarter’s growth in export volumes of 1.8 per cent has been swamped by the 3.2 per cent growth in import volumes, meaning that “net exports” – exports minus imports – subtracted 0.2 percentage points from the overall growth in real GDP during the quarter.

After Lowe’s decision on Tuesday to raise rates yet again, Chalmers wasn’t mincing his words. “I do expect that there will be a lot of Australians who find this decision difficult to understand and difficult to cop – ordinary working Australians are already bearing the brunt of these interest rate rises, they shouldn’t bear the blame too,” he said.

“The Reserve Bank’s job is to quash inflation without crashing the economy, and they will have a lot of time and opportunities to explain and defend the decision that they’ve taken today.”

Lowe has said repeatedly that he’s seeking the “narrow path” where “inflation returns to target within a reasonable timeframe, while the economy continues to grow, and we hold on to as many of the gains in the labour market [our return to full employment] as we can”.

After seeing the next day’s GDP figures, Paul Bloxham of HSBC bank observed that the narrow path “is looking extremely narrow indeed”. True.

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Now the hard part for the RBA: when to stop braking

In economics, almost everything that happens has both an upside and a downside. The bad news this week is that the economy’s growth is slowing rapidly. The good news – particularly for people with mortgages and people hoping to keep their job for the next year or two – is that the slowdown is happening by design, as the Reserve Bank struggles to slow inflation, and this sign that its efforts are working may lead it to go easier on its intended further rises in interest rates.

But though it’s now clear the economy has begun a sharp slowdown, what’s not yet clear is whether the slowdown will keep going until it turns into a recession, with sharply rising unemployment.

As the Commonwealth Bank’s Gareth Aird has said, since the Reserve Bank board’s meeting early last month, when it suddenly signalled more rate rises to come, all the numbers we’ve seen – on economic growth, wages, employment, unemployment and the consumer price index – have all come in weaker than the money market was expecting.

What’s more, he says, only part of the Reserve’s 3.25 percentage-point rate increase so far had hit the cash flow of households with mortgages by the end of last year.

“There is a key risk now that the Reserve Bank will continue to tighten policy into an economy that is already showing sufficient signs of softening,” Aird said.

That’s no certainty, just a big risk of overdoing it. So while everyone’s making the Reserve’s governor, Dr Philip Lowe, Public Enemy No. 1, let me say that the strongest emotion I have about him is: I’m glad it’s you having to make the call, not me.

Don’t let all the jargon, statistics and mathematical models fool you. At times like this, managing the economy involves highly subjective judgments – having a good “feel” for what’s actually happening in the economy and about to happen. And it always helps to be lucky.

This week, the Australian Bureau of Statistics’ “national accounts” for the three months to the end of December showed real gross domestic product – the economy’s production of goods and services – growing by 0.5 per cent during the quarter, and by 2.7 per cent over the calendar year.

If you think 2.7 per cent doesn’t sound too bad, you’re right. But look at the run of quarterly growth: 0.9 per cent in the June quarter of last year, then 0.7 per cent, and now 0.5 per cent. See any pattern?

Let’s take a closer look at what produced that 0.5 per cent. For a start, the public sector’s spending on consumption (mainly the wage costs of public sector workers) and capital works made a negative contribution to real GDP growth during the quarter, thanks to a fall in spending on new infrastructure.

Home building activity fell by 0.9 per cent because a fall in renovations more than countered a rise in new home building.

Business investment spending fell by 1.4 per cent, pulled down by reduced non-residential construction and engineering construction. A slower rate of growth in business inventories subtracted 0.5 percentage points from overall growth in GDP.

So, what was left to make a positive contribution to growth in the quarter? Well, the volume (quantity) of our exports contributed 0.2 percentage points. Mining was up and so were our “exports” of services to visiting tourists and overseas students.

But get this: a 4.3 per cent fall in the volume of our imports of goods and services made a positive contribution to overall growth of 0.9 percentage points.

Huh? That’s because our imports make a negative contribution to GDP, since we didn’t make them. (And, in case you’ve forgotten, two negatives make a positive – a negative contribution was reduced.)

So, the amazing news is that the main thing causing the economy to grow in the December quarter was a big fall in imports – which is just what you’d expect to see in an economy in which spending was slowing.

I’ve left the most important to last: what happened to consumer spending by the nation’s 10 million-odd households? It’s the most important because it accounts for about half of total spending, because it’s consumer spending that the Reserve Bank most wants to slow – and also because the economy exists to serve the needs of people, almost all of whom live in households.

So, what happened? Consumer spending grew by a super-weak 0.3 per cent, despite growing by 1 per cent in the previous quarter. But what happened to households and their income that prompted them to slow their spending to a trickle?

Household disposable income – which is income from wages and all other sources, less interest paid and income tax paid by households – fell 0.7 per cent, despite a solid 2.1 per cent increase in wage income – which reflected pay rises, higher employment, higher hours worked, bonuses and retention payments.

But that was more than countered by higher income tax payments (as wages rose, with some workers pushed into higher tax brackets) and, of course, higher interest payments.

All that’s before you allow for inflation. Real household disposable income fell by 2.4 per cent in the quarter – the fifth consecutive quarterly decline.

That’s mainly because consumer prices have been rising a lot faster than wages. So, falling real wages are a big reason real household disposable income has been falling, not just rising interest rates.

Real disposable income has now fallen by 5.4 per cent since its peak in September quarter, 2021.

But hang on. If real income fell in the latest quarter, how were households able to increase their consumption spending, even by as little as 0.3 per cent? They cut the proportion of household income they saved rather than spent from 7.1 per cent to an unusually low 4.5 per cent.

If I were running the Reserve, I wouldn’t be too worried about strong consumer spending stopping inflation from coming down.

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Weak starting point for next year’s threats to the economy

It’s clear the economy’s started slowing, with the strong bounceback from the lockdowns nearing its end. That’s before we’ve felt much drag from the big rise in interest rates. Or the bigger economies pulling us lower, which is in store for next year.

To be sure, the economy’s closer to full employment than we’ve been half a century. But limiting the decline from here on will be a tricky task for Anthony Albanese and, more particularly, Reserve Bank governor Philip Lowe.

The Australian Bureau of Statistics’ “national accounts” for the three months to the end of September, published this week, showed real gross domestic product – the nation’s total production of goods and services – growing by just 0.6 per cent during the quarter, and by 5.9 per cent over the year to September.

Focus on the 0.6 per cent, not the 5.9 per cent – it’s ancient history. Most of it comes from huge growth of 3.8 per cent in the December quarter of last year, which was the biggest part of the bounceback following the end of the second lockdown of NSW, the ACT and Victoria.

Since then, we’ve had quarterly growth of 0.4 per cent, 0.9 per cent and now 0.6 per cent. That’s the slowing. Quarterly growth of 0.6 per cent equals annualised growth of about 2.5 per cent. That’s about the speed the economy was growing at before the pandemic, which we knew was on the weak side.

Dig deeper into the figures, and you see more evidence of slowing. Strong spending by consumers was pretty much the only thing keeping the economy expanding last quarter. Consumption grew by a seemingly healthy 1.1 per cent, which accounted for all the growth in GDP overall of 0.6 per cent. The various other potential contributors to growth – business investment spending, new home building, exports and so forth – cancelled each other out.

But get this: that growth of 1.1 per cent was half what it was in the previous quarter. And what were the main categories of strong spending by consumers? Spending in hotels, cafes and restaurants was up by 5.5 per cent in the quarter.

Spending on “transport services” – mainly domestic and overseas travel – was up almost 14 per cent. And purchase of cars was up 10 per cent.

Anything strike you about that list? It’s consumers still catching up after the end of the lockdowns, when most people were still earning income, but were prevented from spending it. We couldn’t go out to hotels, cafes and restaurants, interstate travel was restricted, and overseas holidays were verboten.

As for buying a new car, an earlier global shortage of silicon chips and container shipping mean few were coming into the country.

Get it? Much of the strong consumer spending that kept the economy moving last quarter was driven by life getting back to normal after the lockdowns and the easing of pandemic-caused supply shortages. It’s a temporary catch-up, that won’t continue for long.

Now let’s look at what the quarterly accounts tell us about the state of households’ finances. Despite their strong consumer spending, their real disposable income actually fell a fraction during the quarter, taking the total fall over the year to September to 2.6 per cent.

Why did households’ income fall? Because prices rose faster than wages did. How did households increase their spending while their income was falling? By cutting the proportion of their incomes they’d been saving rather than spending.

After the first lockdown in 2020, the household saving rate leapt to more than 19 per cent of disposable income. Why? Because people had lots of income they simply couldn’t spend.

But the rate of saving has fallen sharply since then. And in the September quarter it fell from 8.3 per cent of income to 6.9 per cent – almost back to where it was before the pandemic.

As Callam Pickering, of the Indeed jobs site, explains, “households have been relying on their savings, accrued during the pandemic, to maintain their spending in recent quarters”. Lately, however, they’ve “been hit from all angles, with high inflation, falling [house] prices and mortgage repayments all weighing heavily on household budgets”.

“As household saving continues to ease, the ability of households to absorb the impact of higher prices and rising interest rates will also diminish,” he says.

By the end of September, the hit from higher interest rates was just getting started. Of the 3 percentage-point increase in the official interest rate we know has happened, only 0.75 percentage points had yet reached home borrowers.

So, the hit to growth from government monetary policy is only starting. As for the other policy arm, fiscal policy, we know from the October budget it won’t be helping push the economy along. And in the September quarter, falling spending on infrastructure caused total public sector spending to subtract a little from overall growth in GDP.

A similar subtraction came from net exports. Although the volume of exports rose by 2.7 per cent during the quarter, the volume of imports rose by more – 3.9 per cent. A big part of this net subtraction came from the reopening of our international borders. Our earnings from incoming travellers rose by 18.6 per cent, whereas the cost of our own overseas travel jumped by 58 per cent.

Finally, self-righteous business people are always telling us that if we want to real wages to rise rather than fall, there’s an obvious answer: we’ll have to raise our productivity.

Sorry, not so simple, preacher-man. The accounts show that real labour costs to employers per unit of output fell by 2.6 per cent over the year to September.

Meaning that after allowing for the productivity improvement the nation’s employers gained, the increase in wages and other labour costs were a lot less than the increase in the prices they charged.

This suggests business profits are much better placed to weather next year’s hard times than their workers’ and customers’ pockets are. Not a good omen.

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Consumers and Russians keep the economy roaring - but it can't last

They say never judge a book by its cover. Seems the same goes for GDP. This week’s figures showed super-strong growth in the three months to the end of June. But look under the bonnet and you find the economy’s engine was firing on only two cylinders.

According to the Australian Bureau of Statistics’ “national accounts”, real gross domestic product – the economy’s production of goods and services – grew by 0.9 per cent in the June quarter, and by 3.6 per cent over the year to June.

If that doesn’t impress you, it should. Over the past decade, growth has averaged only 2.3 per cent a year.

The main thing driving that growth was consumer spending. It grew by 2.2 per cent in the quarter and by 6 per cent over the year, as the nation’s households – previously cashed up by government handouts, and by most people keeping their jobs and others finding one, but prevented from spending the cash by intermittent lockdowns and closed state and national borders – kept desperately trying to catch up with all they’d been missing.

The other big contribution to growth during the quarter came from a 5.5 per cent jump in the “volume” (quantity) of our exports. Most of the credit for this goes to that wonderful man Vladimir Putin, whose bloody invasion of Ukraine has greatly disrupted world fossil fuel markets, thus greatly increasing our sales of coal and gas.

(It has also greatly increased the world prices of coal and gas and grains, causing our “terms of trade” – the prices we receive for our exports relative to the prices we pay for our imports – to improve by 4.6 per cent during the quarter, to an all-time high.)

But that’s where the good news stops. The other cylinders driving the economy’s engine have been on the blink. A marked slowdown in the rate at which businesses were building up their inventories of raw materials and finished goods led to a sharp slowdown in goods production.

Government spending took a breather, and an increase in business investment in new plant and equipment was offset by a fall in business investment in buildings and other construction.

And then there’s what happened to home building. Despite a big pipeline of homes waiting to be built, building activity actually declined by 2.9 per cent in the quarter and 4.6 per cent over the year.

Huh? How could that happen? Well, the builders say they couldn’t find enough building materials and tradies. Which hasn’t stopped them using the opportunity to whack up their prices. (I believe this is called “capitalism”.)

So, while we listen to lectures from the economic managers about the evil of inflation and how it leaves them with no choice but to slow everything down by jacking up interest rates, let’s not forget that the big jump in the cost of new homes and renovations has been caused by... them.

They’re the ones who, at the start of the pandemic and the lockdowns, decided it would be a great idea to rev up the housing industry, by offering incentives to people buying new houses, and by cutting the official interest rate to near zero. Well done, guys.

Speaking of higher interest rates being used to slow down the growth in demand for goods and services, the first two of the five rises we’ve had so far would have had little influence on what happened in the economy over the three months to June.

But don’t worry, they’ll have their expected effect in due course. Which is the first reason the strong, consumer-led growth we saw last quarter won’t last, even if we see more of it in the present quarter.

Another reason is that households are running on what a cook would call stored heat. During the first, national lockdown, the proportion of household disposable (after-tax) income that we saved rather than spent leapt to almost 24 per cent.

We’ve been cutting our rate of saving since then, and it’s now down to 8.7 per cent. This isn’t a lot higher than it was before the pandemic. And with the gathering fall in house prices making people feel less wealthy, it wouldn’t surprise me to see people feeling they shouldn’t cut their rate of saving too much further.

And that, of course, is before we get to the other great source of pressure on households’ budgets: consumer prices are rising faster than workers’ wages. This no doubt explains why our households’ real disposable income has actually fallen for three quarters in a row.

With businesses putting up their prices, but not adequately compensating their workers for the higher cost of living, it’s not surprising so many people are taking more interest in what the national accounts tell us about how the nation’s income is being divided between capital and labour, profits and wages.

ACTU boss Sally McManus complains that workers now have the lowest share of GDP on record. It follows that the profits share of national income is the highest on record.

What doesn’t follow, however, is that any increase in profits must have come at the expense of workers and their wages. Profits are up this quarter mainly because, as we’ve seen, our miners’ export prices are way up, and so are their profits.

No, the better way to judge whether workers are getting their fair share is to look at what’s happened to “real unit labour costs” – employers’ labour costs, after allowing for inflation and the productivity of labour (that’s the per-unit bit).

Turns out that, since the end of 2019, employers’ real unit labour costs have fallen by 8.5 per cent. If workers were getting their fair share, this would have been little changed.

Short-changing households in this way is not how you keep consumer spending – and businesses’ turnover – ever onward and upward.

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Fixing inflation isn't hard. Returning to healthy growth is

Despite any impression you’ve gained, fixing inflation isn’t the end game. It’s getting the economy back to strong, non-inflationary growth. But I’m not sure present policies will get us there.

The financial markets and the news media have one big thing in common: they view the economy and its problems one day at a time, which leaves them terribly short-sighted.

Less than two years ago, they thought we were caught in the deepest recession since the 1930s. By the end of last year, they thought the economy had taken off like a rocket. Now they think inflation will destroy us unless we kill it immediately.

For those of us who like to put developments in context, however, life isn’t that disjointed. The day-at-a-time brigade has long forgotten that, before the pandemic arrived, the big problem was what the Americans called “secular stagnation” and I preferred calling a low-growth trap.

In a recent thoughtful and informative speech, Treasury secretary Dr Steven Kennedy observed that the pandemic “followed a period of lacklustre growth and low inflation”. (It was so low the Reserve Bank spent years trying to get inflation up to the target range, but failing. Businesses didn’t want to raise wages – or prices.)

So, Kennedy said, “when assessing the policy decisions made during the pandemic there was an additional consideration for policymakers in wanting to not just return to the pre-pandemic situation, but to surpass it.”

One economist who shares this longer perspective is ANZ Bank’s Richard Yetsenga. He describes the 2010s as our “horrendum decennium” where unemployment and underemployment were relatively high, consumer spending relatively weak and business had plenty of idle production capacity.

He reminds us that real average earnings per worker in 2020 hadn’t budged since 2012. “The resulting weakness in consumer demand meant that ‘need’ – the most critical ingredient [for] business investment – was missing,” he says. “Excess demand, and the resulting lack of production capacity, is a pre-condition of investment.”

See how we were caught in a low-growth trap? Weak growth leads to low business investment, which leads to little productivity improvement, which leads to more weak growth.

During the Dreadful Decade, the prevailing view among policymakers was that high unemployment was preferable to high inflation, which might become entrenched. So, unemployment was left high, to keep inflation low.

Yetsenga says this decision to entrench relatively high unemployment was a mistake. “Unemployment, underemployment and the inequality they contribute to, all affect macroeconomic outcomes [adversely]“.

“Those on higher incomes tend to save more, reducing consumption, but those on lower incomes tend to borrow more. Inequality, in other words, tends to lower economic growth and exacerbate financial vulnerability.”

Even so, Yetsenga is optimistic. The policy response to the pandemic has “changed the baseline” and we’re in the process of escaping the low-growth trap.

Unemployment is at its lowest in five decades and underemployment has fallen significantly. Real consumer spending is 9 per cent above pre-pandemic levels, and businesses’ capacity utilisation has been restored to high levels not seen since before the global financial crisis.

As a result, planned spending on business investment in the year ahead is about the highest in nearly three decades.

Yetsenga says the Reserve would like some of the rise in the rate of inflation to be permanent. “If monetary policy can deliver [annual] inflation of 2.5 per cent over time, rather than the 1.5 to 2 per cent that characterised the pre-pandemic period, it’s not just the rate of inflation that will be different.

“We should expect the ‘real’ side of the economy to have improved as well: more demand, more employment and more investment.”

“The role of wages in sustaining higher inflation is well known, but wage growth doesn’t occur in a vacuum. To employ more people, give more hours to those working part-time, and raise wage growth, business needs to see demand strong enough to pay for the labour.

“Some of the additional labour spend will be passed on to higher selling prices. The need to invest in more labour is likely to go hand-in-hand with more capital investment.”

I think Yetsenga makes some important points. First, the policy of keeping unemployment high so that inflation will be low has come at a price to growth and contributed to the low-growth trap.

Second, inequality isn’t just about fairness. Economists in the international agencies are discovering that it causes lower growth. So, the policy of ignoring high and rising inequality has also contributed to the low-growth trap.

Third, the idea that we can’t get higher economic growth until we get more productivity improvement has got the “direction of causation” the wrong way around. We won’t get much productivity improvement until we bring about more growth.

Despite all this, I don’t share Yetsenga’s optimism that the shock of the pandemic, and the econocrats’ switch to what I call Plan B – to use additional fiscal stimulus in the 2021 budget to get us much closer to full employment, as a last-ditch attempt to get wage rates growing faster than 2 or 2.5 per cent a year – will be sufficient to bust us out of the low-growth trap.

Yetsenga’s emphasis is on boosting household income by making it easier for households to increase their income by supplying more hours of work. He says little about households’ ability to protect and increase their wage income in real terms.

Another consequence of the pandemic period is the collapse of the consensus view that wages should at least rise in line with prices. Real wages should fall only to correct a period when real wage growth has been excessive.

But so panicked have the econocrats and the new Labor government been by a sudden sharp rise in prices (the frightening size of which is owed almost wholly to a coincidence of temporary, overseas supply disruptions) that they’re looking the other way while, according to the Reserve’s latest forecasts, real wages will fall for three calendar years in a row.

Since it’s the easiest and quickest way of getting inflation down, they’re looking the other way while the nation’s employers – government and business - short-change their workers by a cumulative 6.5 per cent.

This makes a mockery of all the happy assurances that, by some magical economic mechanism, improvements in the productivity of labour flow through to workers as increases in their real wage.

Sorry, I won’t believe we’ve escaped the low-growth trap until I see that, as well as employing more workers, businesses are also paying them a reasonable wage.

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