The Reserve Bank needs to watch that it doesn't push the economy off a cliff

For most of this year, the warnings and news about inflation have been one of hope for the best but experience the worst. Predictions of future inflation growth have continually been revised upwards and with it has been the suggestion that interest rates need to keep rising. 

But as Labour Market and Fiscal Policy Director, Greg Jericho, notes in his Guardian Australia column, the latest monthly inflation figures out yesterday suggest that maybe the peak could be lower than anticipated. 

While the monthly figures can be a little erratic, they do closely align with the quarterly "official" CPI figures and in October the ABS estimates that annual inflation growth fell from 7.3% to 6.9%. Better still this makes 4 months in a row where inflation has remained around 7%, rather than increasing quickly as it has since the middle of last year.

Combined with the latest Retail Trade figures released this week which showed the dollar amount spent in the shops fell in October, and the volume of spending falling even faster, there are solid signs that the interest rate rises are having an impact.

This means the Reserve Bank needs to be very cautious as much of the impact of the rate rises from September October and November has yet to flow through into the data. And because the rates of existing mortgages take longer to rise than do rates for new home loans this also means that even were the RBA to halt rate rises, for most mortgage holders rates will still be about to rise over the next few months. 

The IMF, OECD, Treasury and the RBA itself all forecast a sharp slowing of Australia's economy next year and into 2024. The rationale has been that this is the cost of needing to reduce inflation, but the central bank needs to be very careful that it does not commit overkill. With the economy and consumer spending already slowing, and inflation showing some good signs that growth is no longer increasing at a rapid rate, the RBA should strongly consider not increasing the rate next week in its final board meeting of the year. 

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Media Release: Deal on IR Reforms Sets Stage for Faster Wage Growth

MEDIA RELEASE | 28 November 2022

Industrial Relations Reform Sets Stage for Significant Acceleration of Wage Growth

A legislative consensus reached over the weekend to approve reforms to industrial relations laws sets the stage for rebuilding collective bargaining and a significant acceleration of wage growth, according to research from the Australia Institute’s Centre for Future Work.

“These reforms will lift wage growth and improve fairness in workplaces across Australia, big and small, in all sectors of the economy,” said Dr Jim Stanford, Economist and Director of the Centre for Future Work.

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Rough times ahead for Austalia's economy as oil, gas and coal companies celebrate

The latest economic outlook from the OECD highlights the precarious path for Australia over the next few years. 

As Labour market and Fiscal Policy Director, Greg Jericho, notes in in his Guardian Australia column, the OECD predicts in both 2023 and 2024 Australia's economy will grow by less than 2%. In the past such weak growth has been associated with recessions. And while a recession is not predicted, unlike for the UK and Germany, the OECD also notes the risks the lie ahead.

One major problem is that most nations around the world are lifting interest rates to attempt to slow their economies and thus reduce inflation. The OECD notes however that when nations act in concert the impact of higher interest rates on slowing the economy is greater, while the impact on slowing inflation is weaker. 

Given Australia has a higher proportion of mortgage holders with variable rates this increases the risk that higher interest rates will slow our economy more than in other nations, and still have less impact on inflation.  

But one sector of the economy are rejoicing at the current conditions that are causing the rising inflaiton - energy companies. 

The OECD notes that the share of GDP being spent on energy by OECD nations is higher now than it was during the OPEC crisis in 1974 and 1980. The evidence again is clear that a windfall profits tax should be levied on coal, oil and gas companies who a reaping massive profits while the cost of living rises sharply for households. 

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Multi-Employer Bargaining Necessary for Fixing Wages Crisis

Proposed reforms to Commonwealth industrial relations laws would create more opportunities for collective bargaining to occur on a multi-employer basis, rather than being limited solely to individual workplaces or enterprises. Business groups have attacked this proposal as a dramatic change that would supposedly spark widespread work stoppages and industrial chaos.

But as our Policy Director Fiona Macdonald argues in this new commentary for The Conversation, multi-employer bargaining is already allowed under variousexisting provisions of the Fair Work Act. The problem is that those provisions do not work. For example, the low-paid bargaining stream in the Fair Work Act has yet to result in a single multi-employer agreement, due to its stringent conditions and inconsistent application by the Fair Work Commission.

Dr Macdonald argues that reforming these multi-employer bargaining streams so they can actually work will be an important part of any strategy to revitalise stagnant wages in Australia. See her full commentary here.

For more details on the failure of existing multi-employer bargaining streams, and core principles for a stronger bargaining system, please also see the Centre for Future Work's submission to the Senate inquiry on the Secure Jobs, Better Wages reform package (co-authord by Dr Macdonald, Jim Stanford, and Lily Raynes), available here.


Wages growth improves but real wages fall at a record rate

The latest wages price index figures show that for the first time since 2013 wages grew by more than 3% in the past year. 

This growth is very welcome. It highlights that far from wages driving inflation, wage growth is only now beginning to grow at a pace that would be expected given the low level of unemployment. But as Labour Market and Fiscal Policy Director, Greg Jericho notes in his Guardian Australia column, while the level of wage growth we are seeing remains well below what would have been expected in the past with a 3.5% unemployment rate. 

The strong growth came mostly from the private sector through a combination of new financial year individual contracts and the 5.2% minimum wage increase.

But even this is not enough to prevent real wages from falling for the 9th straight quarter. For more than 2 years now prices have been rising faster the wages. It has seen real wages fall back to 2011 levels after a 4.6% fall since September 2020. 

The figures show that greater bargaining power is required for workers as they continue to lose out. The fastest wage growth for a decade should not see the biggest fall in real wages on record. 

We know that greater enterprise bargaining producers better wages growth. That business groups are so against the provision in the Fair Work Amendment Bill demonstrates how worried they are about the ability of workers to have increased ability to bargain. 

Profits have been growing faster than inflation, but wages are not. 

The latest wage growth figures are pleasing to see, but they also demonstrate the challenges ahead, and just how greatly workers' living standards have been hit by price rises that they did nothing to cause. 

 

 

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Gas companies are profiting off of human misery - we need a windfall profits tax

Russia's illegal invasion of Ukraine caused a massive surge in gas and LNG prices that have enabled gas companies around the world, including Australia to make record-level profits. 

But none of these profits have come from either management decisions or productive investments. The price rise has not come from any economic improvements. No, they have come only from an illegal invasion that is causing great human misery. 

Labour market and fiscal policy director Greg Jericho notes research suggests that the gas sector has accrued around $26bn in profits due to price rises affected by the Russian invasion. He argues that all of these profits should be garnered in taxation - a view that echoes that of former Treasurer Secretary Ken Henry.

This revenue would be enough to cover the cost of rewiring the nation and greatly assist the tradition to renewables.

But the problem of revenue are much deeper than the need for a windfall profits tax.

Jericho's analysis of industry data reveals that the industry pays much less company tax relative to production than it did in the past. 

Had the industry paid the same level of company tax relative to revenue that is had in the decade prior to the opening of the Gladstone port, in 2019-20 alone, an extra $9.1bn in tax revenue would have been raised. 

Oil and gas are Australia's resources. Not only are their emissions causing climate change but the profits are largely headed overseas, and more than in the past not flowing through into taxation.

As Australians demand better and wider government services, and the costs of dealing with climate change grow ever higher, we need to ensure the fossil fuel companies pay their rightful share 

 

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With household incomes set to fall, we need to think about what matters in the economy

The current tightening of monetary policy is undoubtedly having an impact. While it may take some time for the slowing of inflation to flow through to the official CPI figures - especially given the level of inflation that is being imported - the economy is set to slow drastically. 

As Labor Market and Fiscal Policy Director Greg Jericho notes in his Guardian Australia column the Reserve Bank in last week's Statement on Monetary Policy, has forecast GDP growth to slow to levels normally associated with recessions - even if the RBA is not actually forecasting a recession. 

However, in one area the RBA is not hedging at all - that of real household disposable income. This measure, which essentially examines the living standards of the average household, is forecast to decline at a pace as bad as any experienced in the past 60 years. 

While a fall in household incomes was always expected given the abnormal level of stimulus that occurred during the pandemic, the fall is predicted to be much greater than just going back to where we were. The Reserve Bank predict incomes will fall well below the pre-pandemic trend level. 

That such a drastic fall has received little coverage highlights that the orthodox commentary and debate around the economy largely focuses on aspects that minimise workers and households in place of corporations and the "broader" economy of GDP. 

The cost of taming inflation is too often discussed in terms of whether it will send the economy into a recession, without examining if that measure misses the real-life experience of most people. 

If the RBA forecast comes true, inflation will have been brought back to the RBA target, GDP will have kept growing, but household living standards will have plunged. 

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Would further interest rate rises do more harm than good?

In the past 7 months, the Reserve Bank has increased the cash rate by 275 basis points. That is as fast as any time since the RBA became independent. Given the pace of inflation growth, the rises are not wholly without cause, but as policy director, Greg Jericho notes in his Guardian Australia column the main drivers of inflation are now easing, and wages are yet to take off. In that case, should the RBA continue to raise rates given it will only slow the economy further?

Over the past year, the main driver of inflation has been house prices accounting for a quarter of the 7.3% rise in the CPI. And yet we know that house price growth is now either slowing dramatically or even falling in some areas. The RBA has also noted that commodity prices are falling and supply-side issues are being dealt with and that these aspects, which are not influenced by interest rates, will reduce inflation next year.

At the same time, the Reserve Bank continues to sound warnings of a wage-price spiral despite any evidence of such a thing occurring. Indeed the latest CPI figures show that overwhelmingly inflation is driven by the price rises of goods rather than services. This is important because service prices and wages are strongly linked.

More rate rises will certainly continue to reduce demand in the economy as the cost of servicing a mortgage rises. But to what end? The main factors driving inflation are easing, wages have not risen above 3% yet, let alone to a rate anywhere near inflation.

Even if wages were to rise in line with the historical link with service prices, in September they would have risen 3.5% - a level very much consistent with inflation growth of between 2% and 3%. And yet we know that wages are unlikely to rise that fast. The most recent estimates have it closer to 2.8%.

The great risk now is that further rate rises will only hurt the economy for little gain and see wages growth stunted before they even get to a level that would see real wages rising.

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Inflation is soaring and real wages are plummeting

On Wednesday the latest inflation figures showed that in the 12 months to September prices across Australia grew by 7.3% - the fastest rate since 1990. 

The biggest concerns about the figures are that inflation is rising fastest for items that are non-discretionary, which means people are unable to avoid paying them - things like food, energy bills, transport costs, and health costs. As Labour market and fiscal policy Director, Greg Jericho, notes in his Guardian Australia column low-middle income earners have to spend a greater share of their income on these items than the average, which means they are hurt hardest. 

The inflation figures also show that while house prices are still rising strongly, the rising interest rates are now starting to truly have an impact on rents. Rental prices across every capital city rose by more than 1% in the September quarter - the first time that has happened since 2007. 

But the real damage of inflation is seen in relation to wage growth. The Reserve Bank estimates that wages in the 12 months to September will have grown just 2.85%. This means people's ability to buy things with their wages has fallen over 4% in the past year. This is a massive drop in real wages and unfortunately, it is expected to continue at least until the middle to end of next year. 

Right now real wages are back where they were 12 years ago. It is a damning indictment of the Industrial Relations system that has been designed to keep wages down. The Government today has introduced the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Bill 2022 which seeks to provide workers with greater power to bargain for better wages. Given the latest figures, it is clear how urgently the changes are needed.

 

 

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Job Opening: Carmichael Distinguished Research Fellow

The Carmichael Centre at the Centre for Future Work invites applications for the Laurie Carmichael Distinguished Research Fellow position. It's a three-year posting, with awesome potential to explore a range of progressive issues related to unions, collective bargaining, industrial policy, and workers' education.

Applications are due at 11:59 pm 21 November 2022. The Melbourne-based position will start in January. Please see job description and application details below. Come and join our team!

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