The economic uncertainly of the coronavirus has seen the Reserve Bank revise down its expectations for growth for this year, but even without such hits to the economy it is clear households have little willingness to spend in an era of low income growth.
In the latest statement on monetary policy, issued on Friday, the Reserve Bank is trying to straddle the position of being concerned about the impact of fires and the coronavirus and also being upbeat.
The beginning of the economic outlook chapter of the RBA’s statement suggests little to worry about. It notes “the outlook for the Australian economy is for growth to pick up over the next two years, supported by accommodative monetary policy, a pick-up in mining investment and a turnaround in dwelling investment.”
It really is not all that different from the opening of the previous statement in November which stated that “growth in Australia’s major trading partners is expected to remain around its recent pace over the next two years”.
But once the positive opening was out of the way, the RBA delivered the bad news of the fires and the coronavirus. It noted that the forecasts for GDP growth have “been revised a little lower in the near term to account for some effect from the recent bushfires and the coronavirus outbreak in China; beyond the near term, forecasts for growth are largely unchanged”.
And while the suggestion that the longer terms forecasts are largely unchanged might imply some degree of positivity, the reality is that the margins of error on those forecasts are pretty wide. While the RBA suggests our economy will grow by 3% in the year to June 2021, it is only 70% sure that the economy at that stage will be growing between 2% and 4%.
As it is, when we look at the progression of forecasts for GDP growth for the 12 months to December 2019 and Jun 2020, we see a steady progression down from the original predictions of 3%-3.25% to the current forecast of 2% growth:
The Reserve Bank also sees little joy ahead for workers. It expects wage growth to stagnate at around 2.2% annual growth while inflation growth is expected to remain below 2% until the end of next year.
If that was to occur it would mean inflation growth would have been below the RBA’s target of 2%-3% for six years.
And because the RBA does expect inflation growth to slightly increase while wages growth remains stagnant, and if anything weaken, it means that real wage growth for workers is expected to fall from the current, already weak, rate of 0.6% to just 0.2% in the 12 months to June 2022.
Given the changes to taxes and payments as a result of the nominal wage increase that would likely mean household incomes will be flat or even falling in real terms.
And that is a situation, as we have seen over the past years, which is not conducive to a strong economy.
We see that most clearly in the pathetic level of spending in the retail sector.
In November there was a rather unusual and strong surge in sales. At the time I noted that “if the big boost in November came at the expense of big pre-Christmas and post-Christmas shopping in December, then it is just a blip and nothing more. If not, then we might be able to say that things are looking up”.
We know it as most decidedly a blip.
In December, retail trade fell 0.54% – the biggest one month fall since March 2013:
The December retail figures also contain the latest quarterly volume figures. These saw a 0.5% increase in the December quarter – the best since the middle of 2018. But that there was a solid increase in the last quarter of last year is not so much a sign of things getting better but more an indication that things couldn’t get much worse.
After four quarters where the volume of retail sales actually fell or stayed flat, it would almost be impossible, outside a recession, to have another quarter of such horrendous growth, especially in the period that includes Christmas:
But the annual growth reveals the real state of affairs – the 0.4% growth is among the worst ever recorded – the fourth-worst result since the 1990s recession.
Our housing sector remains utterly moribund. Incomes are not growing at anywhere near the level that would see a sustained surge in spending, and the impact of the fires and the coronavirus mean that people will likely remain hesitant about what the future holds.
And with the Reserve Bank continuing to predict that wages growth will remain low and that the economy is currently having a bit of a stumble, unless the government sees fit to come to the rescue and determine a strong boost in spending is required to get some life into the economy, that hesitancy is likely to continue for another year.
• Greg Jericho writes on economics for Guardian Australia
