Population growth masking Australia’s economic weakness: CBA report

July 12 2017
By business reporter Michael Janda for ABC News.

Australians continue to go backwards on many measures of income and wellbeing as high immigration rates see the nation’s weak economic growth split between more people.A report by Commonwealth Bank senior economist Gareth Aird has found that Australia’s high immigration intake is papering over economic weakness in headline figures, but when you break down those numbers per person a bleaker picture is revealed.”Per capita measures of the economy suggest that growth in living standards has stagnated and for some sections of the resident population, in particular younger people, it has gone backwards,” he wrote.This weakness is reflected in many aspects of living standards: from stubbornly high underemployment and weak wages growth to surging home prices and debt, as well as an increase in urban congestion.

Mr Aird pointed out that Australia has one of the highest population growth rates among developed economies, more than half of which is due to net immigration.

However, while this makes Australia’s headline economic growth rate look reasonable, on a per capita basis GDP growth has been trending downward since the recovery from Australia’s last recession in the early 1990s.

This in turn has seen the Bureau of Statistics’ key measure of household living standards – real net national income per capita – essentially flatline since the global financial crisis.

While there has been a recent modest uptick, it has been driven mainly by the rebound in commodity prices, much of which Mr Aird expects to reverse.

It has also gone almost exclusively to corporations through higher profits, while the share of national income going to workers has fallen to record lows.

Growing reserve army of labour

Mr Aird said this is largely due to near-record rates of underemployment that, when combined with stubbornly high unemployment, left a large pool of people competing for available jobs.

“If the economy is not generating enough jobs to cover the lift in the population then labour market slack will increase which keeps a lid on wages growth regardless of the rate of productivity growth,” he noted.

“This has been the case in Australia since the mining boom ended.”

So much so that Australian workers are in the worst bargaining position they have been in since the last recession, according to Mr Aird.

“Since mid-2010, wages growth has eased and is currently running at its lowest annual rate since the 1990s recession.”

The Bureau of Statistics wage price index (WPI) was growing at an annual pace of just 1.9 per cent at the end of March and average weekly earnings (AWE) had risen just 1.6 per cent.

“Growth in AWEs has declined by more than growth in the WPI because of the shift in jobs away from higher paying mining-related jobs towards lower paid services sector jobs,” Mr Aird explained.

Workers’ wages going backwards, worse for youth

But on either measure, Mr Aird said the typical Australian worker is now seeing their pay packet go backwards when adjusted for the rising cost of living.

“Adjusting both the WPI and AWE for inflation shows that real wages growth is now negative,” he observed.

“This adds to the financial pressures that households face.

“The negative real wages story is unlikely to change over the near term and may even further worsen when a sharp lift in electricity prices finds its way into the headline CPI.”

Things are even worse for young people, because the ABS consumer price index (CPI) does not include home purchase prices.

So, while rising home prices have been a boon for the wealth of existing owners, they have massively increased the cost of housing for prospective buyers.

“Younger people, who are less likely to have purchased a dwelling but have been saving to do so, have faced a greater deterioration in real wages than is implied by deflating nominal wages by the CPI,” Mr Aird argued.

“This is because the single biggest purchase they are yet to make is not included in the CPI. And it has, of course, been rising much, much quicker than the CPI itself.”

What’s the answer?

According to Mr Aird, the solution to the deterioration in average household living standards is multi-faceted and requires government intervention.

“To put it bluntly, the demand for labour must exceed growth in its supply. This should be tackled from a policy perspective from both the supply and demand side.”

In other words, governments need to pursue policies that help generate more jobs.

However, Mr Aird is also arguing the need to reduce the inward flow of immigration so that those jobs actually soak up some of the existing pool of unemployed and underemployed.

If the Federal Government chooses to maintain a relatively high immigration intake, then Mr Aird is arguing it also needs to work with state governments to ensure sufficient new public services and transport infrastructure to cope.

“The policy decision to run a relatively high immigration intake should be accompanied by commensurate growth in public investment,” he noted.

“If not, in addition to the capital stock ageing, the existing stock of public infrastructure gets diluted which ultimately lowers living standards.”

Read the original article HERE.