December 18, 2019
Major mineral prices – iron ore and coal – are way off their recent peaks, but strong mineral exports continue to be a big part of why the Australian economy has not slipped into recession.
Australia last had an official recession – two quarters of negative economic growth – way back in 1991. Things got bad in the Global Financial Crisis – 2008 – with growth averaging just 0.3% for two quarters. But the stimulus measures of the then Labor Government helped avoid the recessions that took most of the western world.
Right now economic growth is a very weak 0.4% for the three months to end September and 1.7% for the year to end September. If we look at economic growth per person (ie taking out the boost provided by population growth) the growth rate for the quarter was a tiny 0.2%.
The only two sectors that contributed significantly to economic growth were government consumption expenditure (presumably health care and the ramping up of the National Disability Insurance Scheme) and exports – most of which are minerals especially with the drought hitting farm production.
Mineral exports leapt from $237 billion in 2017-18 to $285 billion 2018-19 and are expected to decline slightly – due the price falls – to $282 billion in 2019-20. Within that, iron ore exports are expected to be around $81 billion in 2019-20 while coal will be $57 billion.
The economic growth numbers were reduced by declines in private sector investment, while households are keeping their wallets shut through increasing their savings rather than spending. Retail spending growth in October declined to zero, and nobody seems to be expecting the Christmas sales to be anything to be happy about.
The federal government appears to think this is all OK, and prefers to focus on its planned budget surplus. The Reserve Bank has had to step in with cuts to interest rates to stimulate the economy, but they are now down at all-time low of 0.75% and there is a real question about whether further cuts will have any impact. If households and the private sector don’t want to invest with commercial interest rates around 3% there doesn’t seem to be any reason they will do so in response to something a bit less than that.
Businesses won’t invest if there isn’t the demand for the products and services they sell. And the real problem of a lack of effective demand is due to the crippling mixture of high average household debt and low wage growth.
Average household debt sits at $184,000 – among the highest in the world, while average full-time earnings are $1,695 per week or $88,140 per year. If we use the median income (the wage that has half the workforce above and below it, and therefore is a better reflection of ordinary incomes) the figure for full-time workers is $76,000.
Wages are barely increasing at above the inflation rate – a bit over 2% per year while inflation is at 1.7%. Within those average figures we know a lot of workers’ wages are either flatlining or being cut. If you’re a mineworker who has lost their permanent job and come back as labour hire, we know the pay cut can be 30-40%.
Meanwhile, company tax figures released by the Australian Tax Office in mid-December show that one third of all big companies in Australia- those with revenues above $100 million – paid no income tax at all.
National Research Director