Every piece of economic news seems to be adding to the tug-o-war over interest rates, and yesterday was no exception. Treasurer Wayne Swan was able to tell Parliament, hand on heart, that our economic fundamentals remain strong, while elsewhere OneSteel and Qantas cut a combined 1,400 jobs and Westpac said it might follow suit.
So which side will win, and pull the RBA board over the line for a rate cut or rate increase? Just which is needed?
Well, both and neither is the answer. The RBA board minutes released yesterday were in effect a call for Australians to look elsewhere for their salvation. Monetary policy is vital for the healthy functioning of our economy, but in crude terms its role is to help balance consumption with productive capacity.
It has very little to say about wholesale structural adjustment within the economy – which is why the board appears to be itching to both raise and cut rates.
On the one hand, investment in the resources sector continues unabated, and labour productivity in the mines is tumbling as resources companies pay huge premiums to attract staff while commodity prices remain high.
On the other hand, nearly every other sector of the economy is finally reaching the realisation that Australia has been living beyond its means for too long. The household deleveraging and cautious business investment and job creation are not new – this process began in 2008, but moves slowly. The momentum of our largely foreign-debt funded consumption spree was just too great to turn around overnight.
But like a ship turning at sea, we will probably not be able to get the vessel headed in the right direction again for some time – that is, consumer and business confidence could take a similar number of years to correct, regardless of Swan’s constant reminders of ‘strong fundamentals’.
Some weeks ago I spoke to WA planning minister Brendon Grylls about his plans to expand housing development, as rapidly as possible, in a number of North West towns to put bodies on the ground to work the mining boom. I asked him whether this wasn’t a bit optimistic – wouldn’t house prices in the region tumble when an inevitable commodities price crash arrived?
His answer was insightful: the mining companies “aren’t investing for $300 per tonne prices, they’re investing for $100 per tonne”.
That, for me, says more about the restructuring of the Australian economy than anything I’ve read or heard elsewhere. The WA government wants to build cities in the north because it cannot conceive of a future that does not include Australian resources exports as a major driver of our national economy.
Put another way, the resources boom does not have to maintain anything like current prices for our best “competitive advantage” to shift to the resources states.
The implications for companies like OneSteel and Qantas are clear. The one-off structural shift caused by the rapid development of China and India will keep the dollar high enough to cripple many other industries.
In China’s case in particular, if development does not fit this scenario, the alternative is horrifying – growing social unrest and conflict spreading like a fire across a population of 1.3 billion people. It’s clear why Beijing will do almost anything to keep the iron and coal of China’s industrial revolution flowing.
Which brings us back to Australia’s rates debate. Should Glenn Stevens and his board hike or cut?
This should not be our main question. The economy is being dramatically reshaped by global forces and a good place to start assisting that process is addressing the plummeting productivity in the mines.
It is misplaced, in my view, to the see the problem in terms of a “union power grab” in the mines pushing up wages to astronomical levels. Yes the unions are taking control, and I thoroughly agree with those who question why a fair day’s work in the Pilbara is worth a quarter of a million bucks a year.
It is also a mistake to see the Fair Work Act as the prime cause of these wages blow-outs. We have a huge mismatch between the supply and demand for skilled labour and whatever changes to the Fair Work Act are needed to assist manufacturing, tourism and hospitality and business services in the capital cities, they will not solve the supply problems of a country that let its training and education capacity slip for a decade.
Labor has gone some way in beginning to address the skills crisis with the $3 billion skills and training package it announced in the May budget. It is also pleasing to see, in education, that a near-doubling of federal funding for tertiary-level research has helped lift more of our universities into the top league tables.
But the slow and painful restructuring of the economy towards maximising our competitive advantage has a very long way to go. I personally don’t want to move to the Pilbara – I guess most people don’t. But as long as that is where the capital is flowing, and as long as our terms of trade are pushed up by coal, iron ore and LNG, people will have to follow the capital.
The most likely scenario is that we will go on arguing week in, week out, about monetary policy and about whether the Fair Work Act is the source of all our woes. If so, that is a shame – the Australian economy of 2025 will look quite different to today, and the sooner we focus on the real issues, the more prosperous we will be.
This article first appeared on Business Spectator.
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