The economy is struggling and the election campaign needs to start facing up to it

Greg Jericho (The Guardian 25 Apr 2019) makes some very good points in the following article. At the moment, the Australian economy is doing even worse than it has been in recent times. This is not only being ignored in the present election campaign. There is a pretence that it is going along nicely, and the budget surplus mantra has wrongly been put on centre stage. Government should be stimulating the economy. Not restricting it.

Right now, the fiscal policy argument being played out is pretending everything is sweet and dandy. It is not. Amid all the argy-bargy of the election campaign the latest inflation growth figures from the bureau of statistics show that the economy is in serious trouble and that both major political parties and the Reserve Bank have got their settings massively wrong.

The government’s major claim of the budget earlier this month was that a surplus would be delivered next financial year. In an indicator of their willingness during the election campaign to play fast with the truth, the Liberal party also decided to treat the future tense as the past and proclaimed that they had delivered a surplus (back in black, don’t ya know!).

But the idiocy of taking credit for something that has not yet occurred overshadowed the fact that wanting to put the budget into a surplus at this moment is itself the wrong policy – a mistake the ALP is happy to own as well given they boast that their surplus will be even bigger.

And that chest-beating over who has the bigger surplus ignores the reality that at the moment the economy is absolutely struggling.

The latest inflation growth figures released yesterday showed that in the first three months of this year prices on average did not grow at all, and over the past year they grew by just 1.3% – the slowest growth since September 2016:

The Reserve Bank’s underlying inflation growth measure, the “trimmed mean”, grew by just 1.6% and the “weighted median” measure grew by an even slower 1.2%. The average of the two underlying inflation measures has now been below the RBA’s inflation target of 2% for three and half years – ie the entirety of the Turnbull-Morrison government.

The quarterly CPI growth of 0% was matched by a record low underlying inflation growth of 0.1% for the weighted median and 0.3% for the trimmed mean:

And while some of the cause of slowing inflation growth was falling oil prices that flowed into lower petrol prices, the price of “non-tradable” items – ie things which have a price only determined in Australia and are not affected by world prices – grew by a historical low of 1.8%:

There is no demand in the economy pushing up prices, and right now the fiscal policy argument being played out across the election campaign is pretending everything is sweet and dandy.

It is not.

Moving to a surplus is a sensible economic approach if the economy is also moving toward full capacity. Moving to a surplus removes demand from the economy – it is a smart thing to do for example when you are in the middle of a mining boom and inflation growth is continually rising faster, as occurred from 2004-2007.

But right now there is no boom and sure as heck no rising inflation growth that would be alerting us that we are nearing capacity.

The amount of spare capacity in the economy is evident from last week’s latest labour force figures which showed unemployment at 5% but underemployment at 8.2%:

It means the gap between the two measures remains at near record levels and is a major reason why, despite relatively low unemployment, inflation remains dead.

Since 1978 there have been 13 quarters when the unemployment rate has been either 5.0% or 5.1%; in the past such periods have seen inflation growth well above 2%, not well below as is the current situation:

The reality is our unemployment level should be much lower, and both parties should be aiming for it to be so – and not through “efficiencies or IR policies” but through actually priming the economy with a deficit.

The problem is not that inflation is out of sync with unemployment, but that inflation growth remains very much in sync with underemployment. So long as underemployment remains high, we will not see inflation nor wages growth improve:

For the past three years the Reserve Bank has had rates at record lows, but it has remained unmoved, hoping against hope and evidence that things will improve.

There are two levers to induce demand in the economy – monetary and fiscal. We have had the RBA with the foot firmly on the accelerator, but unwilling to push any harder, while the fiscal policy has largely been about applying the brakes.

And because of our utterly brainless narrative about “surplus good; deficit bad,” we are less than a month from an election where both major political parties are content to keep pumping the brakes.

In all likelihood the RBA will now cut rates next month. This is not a good thing. It is a sign that they continue to have to do all the heavy lifting, while the economic debate continues to exist in a fantasy land.

We aim for annual economic growth of 2.75% to 3.25%. At such levels, the economy is growing nicely – not too fast, not too slow. We also aim for inflation from 2% to 3%. With a growth of 1.3% it means the next GDP figures would need to show growth of 3.5% just to be at the bottom of the sweet spot range:

economy to grow by over 2% in the March quarter alone – something that has not happened for more than two decades.

The economy is not purring along. It is struggling to breathe.

The inflation figures should snap the political debate out of its current idiocy of assuming everything is fine – that we can project out for 10 years government debt and tax cuts and pretend they are in any way realistic.

The economy is struggling, and the election campaign needs to start facing up to it.