Thursday’s excellent news of another reduction in unemployment comes hot on the heels of the NAB economics department reporting business conditions surged to a record high in March.
That’s great, but it doesn’t mean business conditions are at a record high.
And beyond the good news (which isn’t quite as good as it appears) lurks a bigger problem: What happens when the current surge of pent-up demand and asset price inflation passes?
Is this the real deal, the kickstarting of sustainable strong growth the nation needs, continuing to reduce unemployment, or a sugar hit disguising a deeper underlying malaise?
First that good news. Yes, the NAB’s March business conditions and sentiment survey released on Tuesday was a ripper, the highest score since the survey started 32 years ago.
The NAB surveys are well done and are used by the RBA and Treasury when trying to work out which way is up.
The survey score is an indicator of subsequent economic growth. In the case of the March survey, GDP growth of perhaps 4 per cent in 2021, which is in keeping with the IMF’s revised guess.
But what nearly everyone reporting the NAB survey misses is that it is not an absolute measure of business conditions, of dollars and cents, of goods ordered.
It records the balance between businesses saying conditions are better than they were the previous month and those saying conditions are worse.
As we bounce back from last year’s uncertainty and the lockdown plunge with plenty of pent-up demand to be satisfied, it is not surprising many, many businesses are reporting conditions are better.
That’s why the actual NAB commentary with the survey was more restrained than the headlines: “The strength in conditions alongside high levels of capacity utilisation, point to an economy that is continuing to grow at a relatively healthy rate as we transition through the wind-up of the JobKeeper program and beyond.”
It is particularly important for us all that Treasurer Josh Frydenberg doesn’t get carried away with the headline good news when framing next month’s federal budget.
Hopefully he and his Treasury econocrats also read Wednesday’s less-noticed NAB Forward View, which put Tuesday’s survey into perspective, concluding that: “The key implication of ongoing slack in the labour market (as well as the economy more broadly) is that wages growth and hence inflationary pressure will remain soft, despite above-trend growth in the near term. This points to ongoing easy monetary policy, and possibly the need for further fiscal support.” (My italics.)
On the monetary front, the NAB economics team expects the RBA to conduct a third round of QE, buying another $100 billion of government bonds for a total of $300 billion.
That expectation is while believing GDP growth will be shown to have fully recovered to its pre-COVID level, albeit with unemployment remaining about three-quarters of a percentage point higher.
A little perspective is needed
Yet again, this is where a little perspective is called for.
Getting back to pre-COVID GDP growth is very nice compared with 2020’s many fears, but our pre-COVID growth was nothing to be content about.
The current sugar hit is lifting us back to where we were in 2019, that is, suffering substandard business investment and miserable wages growth.
The danger is that the present consumption surge will have run its course just as Mr Frydenberg is launching severe fiscal consolidation, alias “austerity”, as he is being urged to do by the usual suspects. (Yes, the AFR, I’m looking at you.)
Since the horrifying austerity picture graphed by the RBA in February, the expected size of this year’s federal deficit has shrunk primarily thanks to iron ore and other commodity prices being higher than forecast and unemployment being lower.
We’ll have numbers to play with in four weeks with the budget, but at this stage it looks like the 2020-21 deficit will be about $50 billion less than Treasury thought in December.
That would roughly mean Mr Frydenberg’s current plan to reduce government stimulus by about 10 per cent of GDP over three years would become a reduction of maybe 7.5 per cent over three years.
That average of 2.5 per cent a year is still scary. It would be five times faster than the average rate of fiscal contraction after the GFC.
A government drag of 2.5 per cent a year would require gangbusters private sector growth to avoid rising unemployment.
And remember it is present policy to scrap the low-to-middle income tax offset, meaning the vast majority of Australian workers will suffer a tax increase of $1080.
(Never mind the economics, given the government’s rash of political embarrassments and failures, there has to be a very good chance the LMITO will be extended again.)
The sugar hit won’t last
Earlier this week the government discovered the value of Australia’s tourism deficit that’s been mentioned on TND pages a few times, that normally more Australian tourists go overseas for longer and spend more than foreigners come and stay and spend here.
In September, Monash University’s Isaac Gross priced the difference at $18 billion. Treasury now thinks it was worth some $7.5 billion in the December quarter as that frustrated tourism money was spent on everything from cars and online shopping to art and real estate deposits.
In round numbers, post immediate surge, let’s say it’s worth $20 billion a year while the borders remained closed.
That’s nearly 20 per cent more than the federal government has spent on the Coronavirus Supplement for individuals – the temporary boost to pensions and JobSeeker and such.
That extra dosh while the borders remain closed doesn’t continue to add much growth after the initial surge. It won’t be doing much for the new financial year or anything for 2022-23.
Instead, sustainable growth will get back to the missing business investment and wages growth.
The former as a share of nominal GDP, as shown in another scary graph from a speech by Reserve Bank governor Philip Lowe last month, was back around the recessionary levels of the early 1990s recession before the pandemic and has deteriorated further.
For the umpteenth time in this space, non-mining business investment won’t grow strongly until there’s stronger, sustained consumption and that won’t happen until consumers experience stronger, sustained wages growth – the thing the RBA keeps hoping and waiting and praying for.
Good luck with all that while the federal government continues to run a wages suppression policy and threatens to embark on an unprecedented austerity program.