21 September 2012
Jobs to bear brunt when commodity price boom ends
Australian Financial Review
Economists and business warn that jobs will bear the brunt of a faster- than-expected end to the commodity prices boom after eminent economist Ross Garnaut predicted Australia would struggle to cope with falling living standards.
Stephen Anthony, director of budget policy at the Canberra-based modelling firm Macroeconomics, said Professor Garnaut was the “doyen” of economic forecasting and was the first to pick Australia was on the cusp of a long-term mining boom as early as 2003.
“Now he [Professor Garnaut] has picked the consequences of the downside of the boom and we will see lower incomes, lower employment growth and negative wealth effects.”
Mr Anthony said allowing employers to offer flexible employment conditions would be the “optimal policy response” during an economic slowdown so that companies would be able to reduce employees’ working hours, without having to sack people.
AAco chairman and former Reserve Bank board member Donald McGauchie said Australia had a “very, very bad record” of waste commodity boom windfalls by losing control of inflation and costs.
He said the high Australian dollar and cheap imported goods were masking high inflation in other non-traded goods in the Australian economy, particularly the cost of government fees and charges, electricity prices and construction prices.
The fall in the terms of trade would happen “quicker than people think” and Australia could not continue to be a high-cost, low productivity market.
Mr McGauchie, Business Council of Australia chief executive Jennifer Westacott, HSBC and Stockland chairman Graham Bradley, and former Reserve Bank board members Dick Warburton urged the Gillard government to be more cautious with its unfunded spending promises as falling commodity prices triggered recession fears.
Deutsche Bank warned a month ago that a sharp drop in the terms of trade would have immediate consequences for Australia’s mining investment pipeline, which was expected to carry the economy through the downturn.
Deutsche Bank economist Phil O’Donoghue said Australia was likely to stop short of a recession next year in what he described as a mid-cycle slowdown.
The bank said there had been only five similar plunges in the terms of trade over the past 50 years, and in three out of five of those occasions, Australia went into a recession.
Deutsche Bank economists predict there should be enough “locked-in overconfidence” in Australia’s investment pipeline, that the continuing capital expenditure activity in the mining sector could carry the rest of the economy through the worst of the slowdown. The gloomy assessments are in contrast to the more optimistic view by the RBA which raised its forecast last month for economic growth in 2012 to 3.5 per cent from 3 per cent.Treasury’s May budget forecast was for 3.25 per cent economic growth this financial year, slowing slightly to 3 per cent in 2013-14.
Ms Westacott told The Australian Financial Review that the nation had abandoned its ambitions to improve productivity and Australia must do more on tax reform, reducing regulation, improving skills and workforce mobility to ensure the nation’s prosperity.
“At one stage, we were talking about a 2 per cent productivity target, now that’s just dropped off the political landscape. Why has it dropped off?
“Why aren’t we making sure that’s a beacon for government policy that all policy – tax regulation, infrastructure – is trying to get us toward that 2 per cent productivity increase.”
Chairman of HSBC and Stockland Graham Bradley said that it was not inevitable that we suffered the same reduction in living standards as Europe but that the federal and state governments had to act quickly to avoid such an outcome.
“You can’t be a high wage, low productivity nation for very long. And you certainly can’t survive that way once commodity prices cool which they are doing rapidly,” Mr Bradley said.
Dick Warburton, former RBA board member and head of the Manufacturing Australia group said there was a question whether Australia would have a soft landing or a medium-to-hard landing from the end of the commodities boom.
“I was a bit surprised at how pessimistic Garnaut was, I didn’t think it would be as hard as that,” Mr Warburton said.
JP Morgan economist Ben Jarman said the positive impact of the terms of trade boom on the job market had been underestimated, and the negative impact would come as a surprise.
“High or rising terms of trade has been subsidising the labour market on the way up, once it stops rising, it is harder and harder to justify wage and income growth.”
“The pressure point here will be the labour market,” Mr Jarman said. “On the hiring side, you are already seeing that in the data, it’s just being offset currently by a lower participation rate.”
The latest official labour force statistics showed falling number of employed people, in seasonally adjusted terms, but the the unemployment rate fell as fewer people were looking for work.