Tag Archives: economic growth

Hackneyed penalty rates debate sells nation short

When politicians and business leaders talk about the need for flexibility, it is usually preceded by the word “labour”, and often comes down to cutting penalty rates, leave arrangements and other worker entitlements.

Which is what makes the contribution by Reserve Bank of Australia Deputy Governor Philip Lowe particularly refreshing.

While Lowe sees a flexible labour market as contributing to the overall adaptability of the economy, it is only but one part of the picture.

Instead, in his speech to the CFA Institute conference, the senior RBA official seen as a front-runner to head the central bank when Glenn Stevens retires, emphasises the importance of a freely-floating exchange rate, financial innovation, robust competition, incentives for innovation and investment in education as critical to the flexibility of the economy.

This is a much broader picture than the current hackneyed focus on industrial relations, and it opens up many more fruitful avenues for action and reform.

The wrongheadedness of the “IR-only” focus underlined by the fact that, by and large, current labour market arrangements seem to be serving the country fairly well.

As Lowe says, during the resources boom there was little spill-over from huge wage increase in the mining sector, while in the subsequent slowdown flexible work hours and weaker wage growth have helped limit unemployment.

“From a cyclical perspective, the labour market has proved to be quite flexible, and things have worked reasonably well,” he says.

In its recent assessment of the nation’s workplace relations, the Productivity Commission similarly thought the IR system was in need of repair, rather than replacement.

“Contrary to perceptions, Australia’s labour market performance and flexibility is relatively good by global standards…Strike activity is low, wages are responsive to economic downturns and there are multiple forms of employment arrangements that offer employees and employers flexible options for working,” the Commission reported.

Not that everything is rosy.

The Productivity Commission was critical of the Fair Work Commission’s “legalistic” approach to award determination, and suggested the need for an “enterprise contract” as a mid-way point between enterprise agreements (unwieldy for small businesses) and individual arrangements. It also said that at the moment it is too easy for employers to dodge punishment for sham contracts and exploiting migrant workers.

But overall the Commission supported, with some caveats, the minimum wage, penalty rates, Australia’s “idiosyncratic” awards system and enterprise bargaining.

Lowe’s speech suggests there are other areas that demand greater attention.

He says maintaining a flexible financial sector will be crucial in ensuring business is able to grab opportunities as they emerge. To achieve this, regulations will have to strike a judicious balance between supporting financial innovation while protecting investors.

Competition policy needs to ensure that businesses harnessing new technologies do not face unfair barriers to entering the market, and that the tax and legal systems – as well as community attitudes – provide incentives for innovation and entrepreneurship.

In education, Lowe says, “continual improvement in our human capital will hold us in good stead”, and has urged the need to strike a balance between developing specific technical and professional skills and encouraging general learning.

Many may quibble about what is on, and not on, Lowe’s list, but it opens things up a much more fruitful debate about what needs to be done to make sure the country is best-placed to take advantage of future opportunities as they arise.

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RBA locks in 2.5 per cent cash rate – for now

Don’t expect interest rates to go up any time soon but, equally, don’t expect them to go down – that was the clear message from the Reserve Bank today.
In unusually direct language, RBA Governor Glenn Stevens has moved to lay to rest interest rate speculation for the next few months, saying the most prudent course for the central bank to take was likely to be “a period of stability in interest rates”.
That is central bank speak for everyone – those predicting imminent rate rises, and those calling for rate cuts – to take a Bex and calm down.
As mortgage holders ponder the pros and cons of fixing part of their loan, and investors do their credit sums, the Reserve Bank has tried to give some reassurance by flagging official rates are not likely to move for some time yet.
As widely tipped, the RBA has decided to hold the official cash rate at 2.5 per cent this month.
What many may not have anticipated though, was the central bank’s unusual willingness to flag its interest rate intentions.
Following the Reserve Bank Board’s first meeting for 2014, Mr Stevens released a statement that showed the RBA is in no rush to change its policy settings.
“On present indications, the most prudent course is likely to be a period of stability in interest rates,” he said.
The Reserve Bank sees no compelling reasons yet for either a rate increase, or a rate cut.
Unexpectedly strong inflation growth in the December quarter (underlying inflation grew by 0.9 per cent to be up 2.6 per cent from a year earlier), along with the falling exchange rate and increased housing activity, had prompted some to speculate that the RBA would soon have to consider raising the c ash rate.
But while Governor Stevens admitted monetary policy was “accommodative”, interest rates were “very low”, and house prices have surged, there was as no yet sign of a dangerous build up in indebtedness. In fact, household credit growth is moderate.
On inflation, the central bank so far does not seem to be phased by the jump in prices in December, some of which it attributed to importers and retailers quickly passing through to consumers much of the increase in costs caused by the easing exchange rate.
Mr Stevens said that although inflation was stronger than the central bank had predicted when it released its most recent Statement on Monetary Policy late last year, it was “still consistent with the 2 to 3 per cent target over the next two years”.
Those arguing the case for a rate cut have pointed to the nation’s anaemic growth rate (2.3 per cent in the 12 months to the September quarter 2013), a plunge in mining investment and weak labour market (the economy shed almost 32,000 full-time jobs in December and the unemployment rate is expected to rise above its current 5.8 per cent) to show the need for more support for activity.
But to this line of argument, Mr Stevens said monetary policy was “appropriately configured” to foster growth in demand (ie don’t expect them to go any lower).
Of course, the RBA might be considering the possibility (raised by Deloitte Access Economics director Chris Richardson) that commercial banks will lower their lending rates as they secure cheaper sources of funding on international markets. The Governor’s statement gives no hint on this front, except to say that long-term interest rates and risk spreads remain low, and there is adequate funding available through credit and equity markets.
As the economy gropes toward sources of growth to replace the sugar hit from resources investment, conditions are likely to stay rocky and uncertain.
In this shifting economic environment the RBA has moved to provide consumers and investors with one welcome point of consistency, at least for the next few months.

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Dire MYEFO numbers just political theatre

The manner by which the Mid-Year Economic and Fiscal Outlook is being released – a speech by Treasurer Joe Hockey to the National Press Club – tells you all you need to know about what this document is really all about.
For many years now it has been apparent that the main significance of the major Government economic statements, the annual Budget and MYEFO, has been as set pieces of political theatre rather than anything much to do with running the economy.
The days of markets surging or tumbling on Budget forecasts for growth and spending are long gone.
In the hands of Treasurers who were able political operators (think Paul Keating and Peter Costello), Budgets were more about imagery than numbers.
Keating had his emblematic turns of phrase, like “this is the one [Budget] that brings home the bacon”. During the 2000s, Costello delivered a string of Budgets with “surprise” revenue upgrades (to the extent that Treasury’s forecasting abilities became the butt of jokes).
This is how Hockey’s performance today needs to be viewed.
When he bemoans the parlous state of Government finances bequeathed to him by Labor, take it as a piece of political theatre, rather than an unsentimental appraisal of the fiscal position.
As has been extensively telegraphed by the Government through a series of leaks, MYEFO is likely to show the Budget deficit has ballooned out to close to $50 billion – a massive deterioration from the $30.1 billion estimated in the Pre-Election Economic and Fiscal Outlook released in mid-August.
Has the world really become so much darker in the past four months? The short answer is no.
While all the publicity surrounding the departure of Holden and other high profile business problems may have you thinking otherwise, the evidence in fact suggests that things are improving.
Internationally, the US recovery appears to be strengthening, China shows no signs of falling into the hole that many feared, and the euro zone appears to be negotiating the (very) early stages of a recovery.
Domestically, low interest rates are boosting housing activity and the dollar is easing lower. Treasury is basing its gloomier outlook on several developments since PEFO. It says the pick-up in non-mining activity and housing activity is slower than it was expecting, while mining investment has fallen more sharply than anticipated. “As a consequence,” MYEFO says, “employment growth is expected to remain subdued, and wage growth is forecast to remain well below trend.” This in turn will mean households hold back on their spending, restraining growth. All quite plausible.

But as Treasury itself admits, “nominal GDP growth forecasts carry with them additional uncertainty. The 70 per cent confidence interval for average annual nominal GDP growth over the forecast period ranges from 2 per cent to 5 per cent”. That is a not-insignificant range.

The economy’s transition away from mining investment-led growth to other supports for activity remains hesitant, and the speed with which other sources of growth develop is uncertain. But there is evidence that consumers and businesses hare shedding the funk that has held back spending and investment (excepting resources) ever since the GFC.
But the political story line Hockey wants to outline begins with Australia under Labor being driven into the ground. Queue forbidding music, dark skies and storm-lashed seas.
Over coming years, the narrative will go, the storm clouds will gradually dissipate, and at some yet-to-be-determined point in the future (though possibly in the months before the next Federal election) the first rays of economic sunshine will pierce the gloom, and the Coalition will be able to assure voters is has the country on track.
It is all a piece of political alchemy.
The fact is, in recent weeks, Treasury will have presented Hockey with a range of forecasts for nominal GDP (and hence, revenue) that range from the optimistic to the pessimistic, depending on various scenarios regarding developments in international economic conditions, the exchange rate, commodity prices, the rate of slowdown in mining investment and the speed of improvement in activity in other parts of the economy.
For his political purposes, Hockey has plumped for the worst-case scenario of soft growth and weak revenue flows.
This is not to say that Treasury has ‘invented’ the numbers to suit the Government’s political agenda – the forecasts are plausible and justifiable.
But they are just part of a range of possible outcomes, as Treasury itself explains in Attachments A and B in Part 3 of MYEFO.

On page 57, Treasury publishes a chart (Chart 3.9) indicating that “there is notable uncertainty around receipt forecasts and that this uncertainty increases over the estimates period”. For 2013-14, the 70 per cent confidence interval is a range of $20 billion and, at 90 per cent confidence interval, it is $30 billion.

Treasury is similarly cautious about its forecasts for the underlying cash balance (Chart 3.11, p58). The 70 per cent confidence interval for its 2013-14 forecast is $25 billion, and at 90 per cent it is $40 billion.

What the Coalition is doing with the Treasury numbers is nothing new. In the same way, for several years in a row, Labor Budgets contained projections for growth and revenue (particularly earnings from the mining tax) that were much more optimistic than many thought probable, because they supported the-then Government’s political goal of achieving a surplus in a set period.
Don’t get me wrong – Government spending is a problem. But the Coalition so far is taking the same Magic Pudding approach to public finances as Labor.
The current game of deficit/surplus one-upmanship between the major political parties is tiresome and empty.
It will only mean something when there is recognition of the much more important issue (as Rob Burgess highlights in Business Spectator today) of the structural position of the Budget.
The Parliamentary Budget Office forecasts the Budget to be in structural deficit until at least 2016-17, and thought bubbles like the Coalition’s ‘Direct Action’ climate change policy and its over-the-top paid parental leave scheme suggest the Government has no more appetite to tackle the problem than Labor ever did.

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OECD: global recovery is ‘real’ but weak

If you are after economic growth, then there’s really on one place to look – Asia (ex-Japan).

In its latest projections for global and large economy growth, the Organisation for Economic Cooperation and Development has revised down prospects for much of the world.

Australia is one of the few brighter spots in the developed world – the economy is expected to grow by 2.5 per cnet next year, and 3 per cent in 2015.

But the OECD’s outlook is premised on a number of important assumptions, not least that the Abbott Government doesn’t implement any more spending cuts than have already been factored in, and that the Reserve Bank of Australia continues to hold interest rates down.

The OECD’s far-from-buoyant view of the world economy in May has been replaced by an even less optimistic outlook, shaped by a series of disappointing results in some emerging economies and several disturbing developments – not least the ridiculous near-debt default in the US.

Nonetheless, such crazy political brinkmanship to one side, OECD Secretary-General Angel Gurria says the recovery underway in the global economy is “real” – you just might have trouble noticing it much for the next little while.

In figures released overnight, the OECD predicts global growth will accelerate from 2.7 per cent this year to 3.6 per cent in 2014 and 3.9 per cent in 2015.

The picture is even less impressive across the OECD member countries – average growth of 1.2 per cent this year, 2.3 per cent in 2014, and 2.7 per cent in 2015.

The US is expected to do ok – growing by 3.5 per cent by 2015, with unemployment headed down close to 6.1 per cent by December of that year.

But the outlook for the Euro area and Japan remains miserable – growth won’t break above 2 per cent in the former and will be well below 1 per cent in the latter.

Underlining the human tragedy of the deep recession in much of Europe, the Euro area unemployment rate is still expected to be close to 12 per cent by the end of 2015.

The really sobering thought in looking at these projections, is that they rely on so many things going right – not least that politicians in the US, Europe and elsewhere, don’t engage in yet more bouts of indulgent and destructive policies that undermine what financial stability there is or erect further barriers to international trade.

Risks abound.

The big plus for Australia is that China is expected to be one of the few bright spots in the global outlook, sustaining annual growth at or above 7.4 per cent over the next two years despite the deadweight of Europe and Japan.

Reflecting this, the OECD is a bit brighter than the Reserve Bank in its outlook for Australia – expecting that growth in the country will accelerate from 2.5 per cent next year to around 3 per cent in 2015 as activity in the non-mining sectors of the economy “gradually strengthens”.

But, it warns, this is outcome is far from a given.

It has warned the Abbott Government against any further fiscal tightening than has already been planned, and is advising the RBA to maintain its current accommodative monetary policy stance.

On taxation, it backs the business sector’s bid for a lower corporate tax rate.

On housing, it advises a shift to “more efficient” real estate taxation, which is code for the states to abolish stamp duties.

It will be interesting to see if the Government’s Commission of Audit is paying attention.

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