Grim reason Australian economy is suffering so much

Over the past three decades, one three-word phrase has generally held true for Australia – but now, times have clearly changed.

ANALYSIS

There is one simple phrase of just three words that has come to often define the discourse about Australia’s economy, “It’s different here”.

Over the past three decades, this phrase has generally held true, excluding the impact of the pandemic, with the Australian economy dodging multiple global downturns and avoiding a technical recession, which is defined as two quarters of negative headline GDP growth.

But behind this veneer of apparent success, the reality of the Australian economic miracle has turned to mediocre inflation adjusted outcomes for households in the past decade.

Over this time period, high levels of immigration, the rise of the liquefied natural gas export industry and the ongoing expansion of the mining sector among other drivers, has masked the weakness of outcomes experienced by households, driving up the headline GDP figure.

Between the June quarter of 2012 and the latest data which covers up until the end of the second quarter of this year, real (inflation adjusted) household disposable income per capita fell by 2.1 per cent.

Even prior to the pandemic and the current period of high inflation and falling real incomes which followed, the data still did not paint a rosy picture. Between Q2 2012 and Q4 2019, real household disposable income per capita rose by just 0.24 per cent.

Over the same length of time prior to Q2 2012, which covers from the start of 2005 to June 2012, real household disposable income per capita rose by 20.4 per cent.

The higher the height, the greater the fall

During the pandemic the impact of various government stimulus measures and the departure of temporary visa holders, saw real household disposable income per capita rise by 8.2 per cent between the end of 2019 and the peak in the September quarter of 2020.

Since then, all of those gains have been lost and today real household disposable income per capita sits 2.3 per cent lower than where it was before the pandemic arrived on Australia’s shores.

And ten things got worse

While Australia has already experienced the largest drop in the developed world in terms of real disposable income per capita, it is unlikely that the situation for inflation adjusted wages growth is going to improve any time soon.

According to a recent analysis by the magazine The Economist, of the ten major nations assessed, Australia has by far the most entrenched inflation. Out of a possible score of 100, Australia scores 78, with its next closest rival Britain coming in with a score of 68. The Economists analysis focused on five measures: core inflation (inflation excluding food and energy costs), unit labour costs, “inflation dispersion”, inflation expectations and Google-search behaviour.

Australia faces deeply baked in inflationary pressures in the form of the conclusion of electricity subsidies and the continued rise in the rental component of the CPI, which is set to remain high for years to come.

Meanwhile, on the wage’s growth front, the latest figures released earlier in the week saw annual wages growing at 4.0 per cent. On the other side of the coin, annual inflation is 5.0 per cent, outstripping wages growth by 1.0 percentage point. The question now becomes how long will it be before annual wages growth sustainably exceeds inflation and how much further damage will be done before the erosion of household spending has finally concluded.

It’s a big hole

Over the past 12 months Aussie households have seen a larger decline in their real disposable per capita incomes than during the Global Financial Crisis and even the dark days of the early 1990s recession, during which the unemployment rate was at its highest level since the Great Depression.

This leads us to perhaps one of the most important questions facing the Australian economy, how long is it going to take for households to dig themselves out of this hole and get back to where they were prior to the pandemic and the peak in real wages recorded in the June quarter of 2020.

All of this has happened before

For those of you who were in the work force back prior to the late 1980s, this loss of inflation adjusted purchasing power is not a new thing. On multiple occasions there were periods during which over 3 per cent of an average wage earners inflation adjusted purchasing power was lost in a single year.

However, as the graph from the RBA below illustrates, this was generally followed by a period of strong inflation adjusted earnings growth, with multiple years recording instances of real earnings growing by more than 4 per cent.

A different time

To borrow one of the favourite phrases of Aussie children, “That was then, this is now”.

In modern Australia the days of wages growing by 5 per cent in inflation adjusted terms are long gone in the rear view mirror. Unless productivity growth could have an increase of a similar degree, even mediocre real wages growth by pre-1990s standards will be immensely challenging to achieve. As things currently stand labour productivity is falling and is currently at the same level as it was way back in 2015.

Source: Alex Joiner – IFM

Based on the average rate of real wages growth in the two years prior to the pandemic, it would take a little over nine years to regain the level of inflation adjusted purchasing power households had prior to the pandemic. To regain the peak in real wages recorded in the June quarter of 2020, it would take just over 13 years.

Ultimately, the rapidly rising cost of living is masking the largest damage to the inflation adjusted fortunes of Australian household disposable incomes on an individual basis since at least the 1980s. But unlike the 1970s and 1980s where a household could recover the lost ground in a single outstanding year for earnings growth, in modern Australia it would take almost a decade to achieve the same feat at pre-Covid levels of real wages growth.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

Originally published as Grim reason Australian economy is suffering so much