Business is pushing the Morrison government to reverse Australia’s productivity slump, despite a slight rise in economic growth that has eased pressure for further fiscal stimulus in this month’s mid-year budget update.
A relieved Treasurer Josh Frydenberg said a soft 0.4 per cent rise in GDP, lifting annual growth from a revised 1.6 per cent to 1.7 per cent, meant the economy was back on track and the budget bottom line was back in the black.
Poor consumption growth of 0.1 per cent during the September quarter was played down by Prime Minister Scott Morrison, who said nominal household disposable incomes were now up 5.1 per cent for the year – the strongest quarterly rise in a decade – and that it was up to people as to whether they wanted to spend the extra money.
“Australians have earned more based on the national accounts numbers, and as a result of the tax relief we provided, they have kept more of what they earn,” Mr Morrison said.
“I’ve always said what they do with it is up to them, it is their money.”
Business investment slumped 2 per cent in the quarter, largely driven by a surprise decline in mining, and the crucial labour productivity measure fell again to minus 0.2 per cent for the year after recording the first annual decline in 25 years for fiscal 2019.
Labour productivity remains well below the decade average of 1.6 per cent.
There are also questions around whether the economy has enough steam to reach and then sustain the Reserve Bank of Australia’s 3 per cent growth forecast for 2021 and Treasury’s forecast for 2.75 per cent growth for fiscal 2020.
Disturbing ‘red ink’
Australian Industry Group chief executive Innes Willox said the government desperately needed to address the growing productivity problem in the economy and stimulate weak business investment.
“The red ink recorded against Australia’s productivity performance is the most disturbing,” Mr Willox said. “Without a turnaround in productivity, we will not return to the more robust growth in incomes and economic competitiveness.”
He said measures were needed to lift business investment, improve workforce skills, tackle excess regulatory burdens and improve organisational performance.
Business Council chief executive Jennifer Westacott backed the government’s determination to deliver its promised surplus but said structural reform had to be delivered.
“We can protect the government’s hard-fought budget surplus and act to give Australians an economy that creates new jobs,” Ms Westacott said. “Political leaders must now double down to deliver reforms that deliver strong and sustained economic growth.
“Lifting productivity also means we will need an education system that leaves Australian students at the top of the pack and a skills system that lets them retrain and reskill over their working lives.
“And it means we must get the enterprise bargaining system back on track because it sees workers paid more and lifts productivity.”
If Aussie consumers and businesses had more confidence, then the upturn would be more robust.
— Craig James, CommSec
While there has been criticism from the Reserve Bank and market economists that the government has been too tightfisted to provide fiscal stimulus, analysis from Deloitte Access Economics shows tax cuts have already driven spending to a decade-high.
Stimulus in the form of bringing forward a business allowance has been one of the main demands.
Mr Frydenberg signalled that this was unlikely to be included in the mid-year economic and fiscal outlook on December 16, as it was still being worked through.
“We are in discussions with the business sector about initiatives in that area,” he said.
He would not confirm whether Treasury’s expectation for 2.75 per cent growth in 2020 was still achievable.
“We will update our forecasts in the mid-year economic and fiscal outlook, but the story today is that we see the economy continuing to grow.”
Shadow treasurer Jim Chalmers pursued the Treasurer in question time over the weak economic growth.
“Is annual economic growth of 1.7 per cent below average, below budget forecasts, below what it was before the election, below what it was when he became Treasurer, below what it was when the government was first elected, or all of the above?” Dr Chalmers asked.
NAB changes call on rates
While the annual rise in economic growth supports the Reserve Bank’s assessment that the economy has passed a “gentle turning point” and that a further interest rate cut is not yet warranted, financial markets have priced in a higher 59 per cent chance of another 0.25 percentage point rate cut in February.
National Australia Bank economists changed their call on interest rates following the weak GDP numbers, and now expect the RBA to start quantitative easing by next year.
“While public spending and exports have underpinned the increase in GDP, this is unlikely to lead to ongoing strong growth in employment,” NAB’s Alan Oster said.
“The unemployment rate is unlikely to fall further and it is likely that the RBA will need to ease policy further to boost employment and reduce unemployment.
“We have changed our rate call to include a further cut to 0.25 per cent by June 2020, with the prospect of a move to QE in the second half of 2020 should the data play out weaker than we forecast.”
Citi’s Josh Williamson said the figures would have changed the tone of the Reserve Bank’s statement after its monetary policy meeting on Tuesday, at which it left the cash rate at 0.75 per cent.
“Our view is that if the RBA had known these numbers yesterday [Tuesday], the December policy statement would have been more dovish. We remain on track for a Feb rate cut,” Mr Williamson said.
However, CommSec’s Craig James said the hold-up to growth was simply about consumer confidence.
“The Reserve Bank continues to emphasise that the economy has reached ‘a gentle turning point’. And a thorough review of the evidence supports this view,” he said.
“If Aussie consumers and businesses had more confidence, then the upturn would be more robust.”
HSBC chief economist Paul Bloxham said the worst was now behind.
“Growth appears to be past its trough,” he said. “[Economic growth] is still sluggish and well below trend, but suggests the economic momentum is moving in the right direction.”