Other Australian economics
Earnings
Real earnings continue to creep upwards and the gender gap is slowly closing.
On Thursday the ABS released its average weekly earnings, showing that over the 12 months to May this year ordinary-time earnings of full-time adults have risen by 4.5 percent. Because over the last year the CPI has risen by 2.1 percent, this suggests real wages have risen by around 2.4 percent. And because mortgages are in nominal dollars, the 4.5 percent rise would have reduced households’ mortgage liabilities.
The graph below shows a longer-term perspective, going back to 2012 (when the present ABS series started).
For all employees, real earnings have recovered to where they were before the pandemic.
There is a continuing difference in the experience of men and women. The gap is wide, but it continues to close. If we disregard the disruption of the pandemic, it appears that men’s earnings are back to their stagnant levels from 2015 onwards, while women’s earnings have continued to rise. This possibly reflects the increases in pay in some of the female-dominated caring professions, as well as advances in gender equality.
Share market report
High share prices are not necessarily indicators of a strong economy: in fact they are probably signalling just the opposite.
Share prices in America and in Australia are hovering around record high levels.
In itself, that shouldn’t be a surprise. When day-to-day fluctuations are smoothed out, we should expect share market indices to track an economy-wide nominal indicator, such as the GDP.
The graph below shows (to different scales), the ASX All Ordinaries index, and the GDP over the last ten years. They move together, but not in lock step.
The Covid-19 disruption is evident on both series. Notably, since around 2018, even before the pandemic, share prices were starting to become more volatile.
And in the six months since February this year the ASX indicator has risen sharply – by 13 percent from its trough. Economists with a partisan bent may attribute this to the Coalition’s worsening polls and the election outcome, confirming that Angus Taylor wasn’t to become our new treasurer, but there are other explanations.
More notable than this surge in share prices is the accompanying rise in the price-to-earnings (P/E) ratio for Australian shares which is now around 20 – if there is a rise in share prices unaccompanied by an improvement in business earnings the P/E ratio will rise, and there has to be some other explanation. That P/E of 20 is not a record – it hit a level of 30 in the late 1960s in the madness of a mining boom, before the share market crashed spectacularly in January 1970 – but for most of the last twelve months it’s been well above the long-term average of around 16.
There is never one explanation for movements in share prices. Recovery from the pandemic is well behind us, and we’re certainly not on the verge of another minerals boom. But as Ian Verrender explains, financial markets are awash with cash, and the investment world is feeding upon itself. Our P/E ratios are high, and America’s are even higher, Verrender explains, because people need somewhere to put their money. American share markets have been showing the most spectacular gains because of the promises of artificial intelligence. Australia’s share market is dominated by banks and mining companies, reflecting our unindustrialized extractive economic structure. Our manifestation of this phenomenon is high P/E ratios for banks: the Commonwealth Bank’s P/E is around 30.
Verrender’s colleague at the ABC, David Taylor, believes that share markets still have a little way to rise before they peak and crash: “We’re not yet at the point of irrational exuberance: investors ‘not quite euphoric’ but close, as share market rollercoaster roars on” reads the headline on his post.
Verrender and Taylor agree that the explanation for share market volatility lies in the economic policies of the Trump administration. When there is a lot of money sloshing around in the hands of billionaires, when there is incipient inflation in what is still the world’s biggest economy, and when the central bank of that country may be stacked with a partisan board directed to lower interest rates, an understandable short-term move is for those billionaires to put their spare cash into equities.
Those investors – better described as speculators to distinguish them from people who make real investments – know that the market is overvalued, but knowing that others are thinking the same way they go on buying shares. It’s known as the “bigger fool” theory, and as Yogi Berra said of positive feedback phenomena, “if something is unsustainable, it will stop”. No one can predict when the market will peak, what will trigger the turnaround, and whether the fall will be slow or precipitous, but Verrender believes that a combination of high capital gains, and low-cost debt finance, may result in many investors becoming dangerously over-leveraged.
As he says “investment busts have a habit of recurring every decade or so, and while painful, are often considered necessary”. He makes a strong point. A share market bust helps bring some sanity back into financial markets – and has the side benefit of putting some low mileage luxury cars on the market, as the share traders move from the finance sector into real jobs and liquidate their personal assets.
That’s pretty well the normal theory of business cycles. But perhaps the US economy, in particular, is about to experience a bout of stagflation as it did in the 1970s. That is when the economists’ assumptions about a trade-off between inflation and unemployment break down, because in America both unemployment and inflation are set to rise. The normal rules of fiscal and monetary policy don’t work, because stagflation generally results from structural rigidities in the economy.
The most profitable firms in America are those with strong market power, and low production costs – low marginal costs in economists’ terms. Software, new media and pharmaceuticals all fall into that category. Trump’s big beautiful bill gives the oligarchs more capacity to invest in such ventures, but even if they do they won’t need to employ much new labour, and because of intellectual property protection they can go on raising their prices. That’s on top of the price rises that are start to follow from tariffs. Cuts in public sector employment will undoubtedly contribute to poor employment outcomes. It's possible that neither the conventional levers of monetary and fiscal policy, nor the unconventional interventions of Trumpian economics, work to their desired effect in an economy beset by the deep structural problems of late-stage capitalism.
The economy as seen by the Reserve Bank
The Reserve Bank is relaxed about monetary policy – too relaxed maybe?
There were no surprises when the Reserve Bank cut the cash rate target by 25 basis points to 3.60 percent. Its press release remains a cut-and-paste with the usual statements about the outlook remaining uncertain and a profound fear that too many workers will remain secure in their jobs.
The graph below shows the RBA’s cash rate target over this century so far, together with a rough estimate of the corresponding real interest rate – the rate net of inflation.[1]
That graph suggests that the real rate is about 1.7 percent: that’s probably on the high side which is why the Bank believes more cuts may be justified. The RBA expects trimmed mean CPI inflation to be 2.6 percent for the next twelve months, implying an expected real rate of around 1.0 percent. That’s low by historical standards, but it’s a common trend in countries with mature late-stage capitalist economies.
The Bank’s economic outlook
The RBA’s Statement on Monetary Policy paints a picture of households generally coping with their finances. Household income is a little above pre-pandemic levels, and people are directing some of their increased income to saving.
Those observations are based on economy-wide averages. Undoubtedly many households, particularly those who became over-committed with borrowing, are finding conditions tough, but the RBA’s findings are not consistent with the narrative of a widespread cost-of-living “crisis”.
The Statement has drawn media attention because it includes a significant downward revision in GDP growth. For example GDP growth over 2025-26 is expected to be 1.8 percent, rather than 2.1 percent as previously forecast. That, in turn, is below the 2.25 percent growth forecast in the budget.
This revision reflects the RBA’s dismal outlook for productivity growth. It notes that an expected post-pandemic resumption of productivity growth hasn’t occurred, and has lowered its forecast for productivity growth from 1.0 percent down to 0.7 percent. Coalition politicians have seized on this revision as evidence of the Labor government’s failed economic policies, but that’s an unhelpful framing of the problem, because our productivity decline is long-term and structural, and is a problem in all similar countries.
Staff of the RBA have been talking to firms about productivity, asking what have been the main barriers to lifting productivity. The “regulatory environment” – a term with many shades of meaning – is the main impediment, followed by “employee skills and availability”. Firms are positive about using artificial intelligence to lift productivity, but they note that to use AI to its full extent will require a more skilled workforce.
The ABC’s Michael Janda, commenting on the RBA’s Statement, picked up a quote in the RBA’s section on productivity:
Many firms also flagged the ongoing fast pace of growth in software prices as a challenge to fully capturing productivity gains from new technology investments.
This could have been written 50, 60, or 70 years ago – although the generic word “intellectual property” rather than “software” would have been used. It’s the dismal story about a country whose businesspeople, public servants and elected officials have failed to invest adequately in education, science, research, and commercialization of technology.
A rough summary of the Bank’s thinking is that all is well because inflation is down and the economy is just a notch off full employment. Monetary mission accomplished. If this is because the country is constrained by structural rigidities, that’s all OK. Perhaps the RBA prefers a static economy to a dynamic one. because when there is a rapid rate of structural change all their equations, such as their precious Phillips Curve, get messed up.
The most positive part of the RBA Statement relates to international developments. The world will probably deal with Trump’s protectionism better than many had earlier expected. For example, what China has lost in exports to the US it has more than offset with exports to other countries. The world economy will certainly be set back by America’s excursion into economic la-la land, but most of the damage will be to its own economy, and so far there has not been an outbreak of retaliatory tariffs by other countries. We may have learned something from the disasters of the 1930s.
1. Mathematically this graph is generated by the formula ((1+Cash rate target)/(1+ CPI)-1), but the CPI is a lagging figure while the real interest rate properly refers to expected inflation. This formula probably overstates the real interest rate, because it uses the CPI rather than the trimmed mean CPI, which has been higher in recent times. ↩