The Implausibly Happy Consumer

Economic forecasts in the Budget Papers

According to the Budget Papers the Australian economy is not forecast to return to trend growth for at least two years. Even that turnaround is based on an expectation that consumers will spend much more while the job market continues to deteriorate and real wages flat line or fall. The unemployment rate is forecast to rise from 5.8% to 6.25% and stay there.

So what makes the authors of the Budget Papers assume increasingly anxious workers will spend more and save less? The answer seems to be the wealth effects of rising house prices and rising share prices. Treasury is forecasting that home owners will increase spending on the back of their perceptions of increased personal wealth, “… enabling consumption to grow faster than income” (Budget Paper No 1, p 2-10).

Increased consumer spending based on a returning housing bubble is not a sustainable economic strategy. In a weakening labour market, with money wages growing at their slowest pace in at least 17 years, it doesn’t seem plausible.

Net exports

As new mine production comes on stream and demand for imported mining capital equipment falls, net exports will contribute to growth. However, mineral production is highly capital intensive and so will not be a major source of job creation. Moreover, mineral export prices are under pressure from new production worldwide.

Investment outlook

Sustainable economic growth requires investment in new productive capacity. Yet as the mining construction boom comes to a halt, nothing beyond dwelling construction is turning up to take its place. Investment in engineering and construction work is forecast to decline by 13% in 2014-15 and by 20% the following year.

The economy is not making the transition from a mining investment boom to investment in a more diversified, productive economy. At an exchange rate above US$0.90, management in exporting and import-competing industries is struggling to make a business case for new investment in non-mining projects.

What is needed?

To achieve sustainable economic growth Australia needs the exchange rate to fall and productivity to rise. A new microeconomic reform agenda is needed to lift productivity growth. It should initially focus on productivity-lagging sectors such as electricity, gas and water utilities.