Housing-led recovery flows into business confidence

Despite the strong economic bounce back from the depths of the pandemic-inspired recession, mixed signals remain on what may happen in coming months. Critical will be the ability of businesses to keep rebounding as government assistance programs are withdrawn. The December quarter national accounts figures released on Thursday underscore the dramatic extent to which consumption, notably the property boom, has underpinned the recovery to date.

The big unknown is to what extent the withdrawal of JobKeeper at the end of this month will sap energy from the recovery clearly under way. Australian Bureau of Statistics figures show how much momentum stimulus measures have put into the economic recovery. In headline terms, household wealth increased $501.5bn (4.3 per cent) to a record $12,033.5bn in the December quarter, the highest quarterly growth rate since the December quarter 2009. Total household wealth and wealth per capita, at $467,709, were at record levels.

The ABS says the December quarter growth in household wealth was driven by rising residential property prices, reflecting record low interest rates, support through government programs such as the First Home Owner Grant and HomeBuilder schemes, and pent-up demand from buyers. Through the year, household wealth grew 7 per cent, slightly below the long-term average of 7.3 per cent. However, demand for credit eased to $63.3bn in the December period, following the previous quarter’s record of $154.7bn.

Feelings of household wealth have fed into business confidence in the March period, with businesses reporting improved financial circumstances and reduced use of government support measures. The latest Business Conditions and Sentiments survey showed 46 per cent of businesses expected it to be easy or very easy to meet financial commitments during the next three months, compared with 23 per cent in August last year. The proportion of businesses reporting decreased revenue halved in March compared with August last year, falling from 41 per cent to 22 per cent. The proportion of businesses using support measures dropped to less than one-third from a peak of 73 per cent in May last year.

All in all, it is a strong position to be in as the economy and business approach the fiscal cliff of the withdrawal of JobKeeper payments on March 28. This is expected to have a measurable impact on small business and the rebounding jobs market. Treasury secretary Steven Kennedy told Senate estimates on Wednesday that Treasury expected the end of JobKeeper to directly cause some businesses to close and 100,000 to 150,000 jobs to be lost, but there was a wide band of uncertainty around this estimate. Dr Kennedy said growth would moderate as Australia moved past the initial phase of the recovery from COVID-19.

Balancing economic growth and continued jobs growth against the benefits of getting more money circulating in the economy is at the heart of the looming decision on increasing the minimum wage. The ACTU has put in a bid on Friday for the minimum wage to be increased by $26.38 a week, a rise of 3.5 cent. The Australian Industry Group will argue that the Fair Work Commission needs to take a particularly cautious approach given the economic and business risks associated with the end of JobKeeper. The issue will be decided in late June, with the new rate to apply from July 1. Last year, at the height of the pandemic lockdown, the FWC approved an increase 1.75 per cent but delayed the additional payment for at least three months for 75 per cent of recipients.

The ACTU says the minimum wage review is a critical opportunity to generate wage growth and keep the economic recovery going. It says the Reserve Bank has repeatedly made clear that wage growth is too low and this is a brake on economic growth and the recovery from the pandemic has so far increased profits but not wages, and labour’s share of GDP has fallen to historic lows. But employers argue the decision should follow the cautious approach of last year.

In making a decision, the FWC must consider the benefits of recent tax cuts for low-income workers and the pending increase in superannuation. It also should be mindful of warnings from the Reserve Bank that wages growth more generally is not expected to pick up until unemployment falls below 5 per cent.

The recovery is under way but tied disproportionately to booming house prices. The challenge is to build strength in the business sector to create new jobs and safeguard the gains that have been made rather than pay more to those who already have a job.