Is Trump-style stimulus what the economy needs?
The Australian economy has displayed remarkable resilience this year, thanks to solid contributions from consumer spending, public demand and export volumes. But as always, we can’t take our lot for granted, with evidence emerging that we’ll face even heavier challenges in 2017. So much so, the Reserve Bank may well need to cut rates again in the New Year unless Canberra offers more of a helping hand through “Trump style” fiscal stimulus.
To be sure, economic data remains mixed. Employment growth is still ticking over and job advertisements are trending up. Home building activity is at a high level and commodity prices have rebounded.
But as regards the labour market, the quality of jobs growth has deteriorated of late, with much of the growth in part-time rather than full-time employment.
Of course, I’ve got nothing against part-time workers – if that suits their needs – but surveys suggest many workers would prefer to work longer hours, as evident from the still heightened “underemployment rate” as measured by the Australian Bureau of Statistics (ABS).
While we can be thankful for growth in the services sector, the lack of decent paying jobs for many that want them is still a policy failure, and is starting to hurt the economy through undermining household income and (even more importantly) consumer spending.
Outside of labour market, moreover, there are other worrying signs. To my mind, possible causes include the lack of clear policy direction in Canberra and the persistently high Australian dollar.
The National Australia Bank monthly business survey, for example, is continuing to report a retreat in sentiment – with the business conditions index down to +5 in November from a recent peak of +13 back in March. In an ominous sign for consumer spending, the NAB survey reported a particularly sharp drop in retail sector sentiment last month.
Meanwhile, home building approvals have slumped in recent months, suggesting the pipeline of new activity is drying up. And the latest capital expenditure survey still suggests a fairly flat outlook for business investment over the remainder of this financial year, with the non-mining sectors failing to offset the slump in mining investment.
Given this backdrop, we can’t easily dismiss the weakness in the September quarter national accounts reported last week. The economy contracted by 0.5% last quarter, which marked only the fourth negative result since the early 1990's recession.
Of course, some of this weakness reflected poor weather interrupting construction. So the good news is that some bounce back in growth is likely in the fourth quarter – thereby avoided the dreaded “technical recession.”
But even a robust 1% bounce back in economic growth would still leave annual growth at around 2% - well short of the RBA’s 3% expectation as recently as last month. The Bank will likely need to take an axe to its economic growth forecasts in its February Statement on Monetary Policy.
Although growth was artificially weak last quarter, it was also boosted by favourable weather and lumpy public sector spending earlier this year. In a sense, therefore, the latest results are something or a “coming back to earth” or “reality check” to remind us that the economy is still stuck in a sub-par growth trajectory.
The biggest worry in last week’s national accounts was consumer spending, which represents 60% of economy. After solid growth through last year and earlier this year, consumer spending grew at an annualised rate of only 2% in the past two quarters – perhaps in belated recognition of the fact income growth has been quite weak. That said, an encouraging sign is that monthly retail sales have rebounded more recently, which bodes well for a better spending outcome in the December quarter national accounts.
But unless wages and/or hours worked lift in earnest, it’s hard to see consumer spending remaining solid in 2017. With home building and business investment also challenged, and Canberra not offering much support, the RBA may well be back in the spotlight before too long.
Published: Wednesday, December 14, 2016
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