The economy is not strong, wages remain weak, and rates will stay on hold

The annual growth rate is still well below par, despite what Scott Morrison says.

The annual growth rate is still well below par, despite what Scott Morrison says.

If Treasurer Scott Morrison really thinks the latest report on the health of the Australian economy represents a “strong set of numbers”, it will be interesting to see what sort of adjectives he comes up with to describe them when they really are strong.

The economy is not strong and the outlook for wages remains weak.

For sure, the economy is in a better position now than at the start of the year when Cyclone Debbie wreaked havoc, and that trend should continue. But it’s anything but strong.

At 1.8 per cent, the annual growth rate is the lowest since 2009 and it was government spending that was the main driver of growth in the June quarter.

GDP growth rates.
GDP growth rates.

Even that was due to a quirk in the statistics that involved switching the new Royal Adelaide Hospital to the public sector from the private sector.

All up, the annual growth rate is still well below par.

The weak performance of the first quarter this calender year, combined with the weak second half of 2016, which included the third quarter, when the economy went backwards, is still being felt.

For example, the economy grew by just 1.9 per cent during the 2017 financial year.

It all means the 3 per cent forecast for 2018 by the Reserve Bank of Australia looks a little stretched right now.

It wasn’t that long ago the central bank was forecasting that the annual GDP rate by now would be somewhere between 3 per cent and 4 per cent.

If it is going to rebound to 3 per cent then the much vaunted increase in household incomes and wages needs to get here sooner than later.

Elsewhere, the latest set of national accounts shows consumers are still doing it tough thanks to a rise of just 0.6 per cent in real household disposable income over the past year.

Any spending they did do helped push the saving rate to an 8½-year low of 4.6 per cent, down from 5.3 per cent.

And as for a decent pay rise any time soon, don’t hold your breath.

Going backwards

A year ago Reserve Bank assistant governor Christopher Kent said there were signs of life in wages growth and pointed to a key measure of wages in the national accounts as proof.

That key indicator, sometimes called AENA – which measures average earnings per employee per hour from the national accounts – has now gone backwards, with the the latest report showing the annual growth rate has fallen from 1.1 per cent to a record low minus 0.3 per cent.

It is this that will worry the RBA the most.

There’s just not much evidence of the rise in wage growth that the bank is hoping for. There might be some hope for a better growth outcome as the next 12 months unfold, but there aren’t many signs inflation will follow it.

It all comes as the statement attached to Tuesday’s board meeting and RBA governor Phil Lowe’s speech that night implies the bank is confident the economy is on track to rebound further.

But the bank also knows the biggest risk to tits upbeat outlook is the consumer.

The ongoing weakness in wage growth, while household debt is so high, is going to disappoint everyone.

It means the cash rate remains on hold for most of 2018, at least.

One driver, however, that will help the local economy over the next year is the global economy.

It is still tipped to improve, although the latest drop in US Treasury bond yields implies traders are happy that the US economy won’t be a big contributor to that, and the Federal Reserve won’t be hiking as much as most economists think.

There are signs in these latest national accounts that infrastructure is already helping out, but it needs to be, as housing construction is poised to slow from its record pace.

All up, however, the same question that gets asked about the US economy all the time could also be posed here: why is the economy still not firing on all cylinders after years of record low interest rates?

Monetary policy is just one part of the solution, fiscal policy another. Five years of bickering in Canberra has also played a big part.

In the US, interest rates have been almost zero since 2009, and despite the Fed’s balance sheet blowing out by as much as $US4 trillion ($5 trillion), the world’s largest economy still has very little wages growth or inflation.

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