It’s official. The Australian economy is “performing well” and stronger than previously thought.
No, this is not some political rhetoric from Prime Minister Scott Morrison during his tour of Queensland this week, but the view of Philip Lowe, the governor of the independent Reserve Bank (RBA).
It means the Coalition government does have a good economic story to tell heading into next year’s national election – strong growth, falling unemployment and, furthermore, a federal budget that could be back in surplus anytime soon.
But opinion polls suggest this alone may not be enough for the now minority government to hold on to power.
As the ScoMo bus hit the Sunshine State this week in what Morrison described as his “I’m listening, I’m hearing and I’m doing” tour, the central bank was holding its monthly board meeting.
As has been the case since August 2016, the Reserve Bank left the official cash rate at a record low 1.5 per cent.
But Lowe’s post-meeting thoughts, and the central bank’s quarterly monetary policy statement released a few days later, were upbeat.
So much so, the Bank warns if the economy progresses as it is expecting, higher interest rates are “likely to be appropriate at some point”.
Noting the economy had grown 3.4 per cent in the past year, Lowe has revised up his outlook to 3.5 per cent for both 2018 and 2019.
He also expects the jobless rate to drop to 4.75 per cent over the next couple of years after striking a six-year low of 5 per cent.
He believes this improvement in the economy should see wages growth lift gradually.
“If they are right, it is a pretty good story,” Market Economics managing director Stephen Koukoulas told The New Daily.
Sadly, the central bank governor has been saying such things on wages for more than a year now.
Without decent pay awards, good economic results will just become meaningless noise and numbers to the electorate.
“If you don’t get a big pay increase it is very hard to maintain or ramp up your spending unless you do one of two things,” Koukoulas says.
“Increase your debt or you run down your savings. Both of those things are near their limit.”
However, there is a chance of some slightly better news on the wages front next week to lift the mood around the kitchen table.
Economists believe the September quarter wage price index – the RBA’s and Treasury’s preferred measure of wages growth – could see an annual rise of 2.3 per cent.
That comes after being stuck in a 1.9 to 2.1 per cent range over a number of years – the lowest in at least two decades – and would compare with an inflation rate of 1.9 per cent.
Such a rise would partly reflect a 3.5 per cent minimum wage rise from July 1.
Still, the drop in house prices, most notably in our two major cities of Sydney and Melbourne, is hurting people’s wealth perceptions and in turn their spending power.
Not a day goes by without another story of housing woe to ramp up people’s fears of a crash.
However, Ken Henry, the nation’s former treasury secretary and now the chairman of the National Australia Bank, describes it as a more comforting “softening period”.
He calculates that in the past 12 months, Sydney house prices have declined 6 per cent, having soared 73 per cent in the previous five years.
“So over the six years house prices are still very well elevated,” Henry told the ABC’s 7.30 program.
“House prices have softened but we don’t foresee anything like a crash.”
The overall good economic story also extends to the federal budget.
After just three months of this financial year, the budget bottom line was $9 billion better off than expected in May.
Recently ousted prime minister Malcolm Turnbull had promised to bring forward already legislated personal income tax cuts pencilled in for 2022 and 2024 if the budget improved.
It will be interesting to see whether the new leadership of Morrison and Treasurer Josh Frydenberg agrees.
“Given the polls they need to do something to try and get back a bit of support,” Koukoulas said.