The economic backdrop Chris Richardson

15 May 2015

Magical mystery tour

• The global and Australian economies • Budgets, dollars and deregulation • Wage trends over the next three to five years • Implications of those wage trends for education • Possible future challenges in wages / HR

The global outlook

The big picture: World income growth shares

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

China India Japan United States

1980s1990s2000s2010s (forecast)

Contribution to global growth

Mixed messages on the globe for 2015 & 2016 The US is looking better, but China is looking worse. For most of the world that’s a draw, with even a little upside thrown in from the Eurozone (where forecasters were too negative). But for Australia, the slowdown in China means that global challenges continue to edge upwards. And the latest to join the casualty list has been Asia’s Tigers, where flagging growth has led to interest rate cuts. Yet so far that combination still spells major trading partner growth at or a little above 4%. Although that’s not exactly shooting the lights out, it is respectable (and a bit better than the two decade average).

Financial markets: Pedal to the metal

The Australian outlook

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1980s 1990s 2000s to 2013 Decade to 2023

Productivity & other Participation

Terms of trade Total living standards

Contribution to annual income growth

Australia’s future productivity challenge

Australia’s economic drivers are changing

50

60

70

80

90

100

110

120

130

0%

1%

2%

3%

4%

5%

6%

7%

8%

1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 2025

Engineering construction to GDP

Terms of Trade

Share of economy Terms of Trade index: 2012-13 = 100

Forecast

Good news for ‘dollar dependent’ sectors

40

45

50

55

60

65

70

75

80

85

0

10

20

30

40

50

60

70

80

90

100

1986 1990 1994 1998 2002 2006 2010 2014 2018

World commodity export prices (index)

TWI exchange rate (RH axis)

Index: World commodity prices, 2012-13 = 100 Index: TWI exchange rate, 2012-13 = 100

Credit is cheaper than it ever has been

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Standard variable mortgage rates

90 day bank bill rates

10 year bond yields

Growth remains below trend

-3%

0%

3%

6%

9%

12%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Nominal national income growth)

The Budget changes gear

The Federal Budget: Easy come, easy go

-100

-50

0

50

100

150

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400

Budget2000-01

Budget2002-03

Budget2004-05

Budget2006-07

Budget2008-09

Budget2010-11

Budget2012-13

Budget2014-15

Effect of the economy on the Budget - DAE

Effect of the economy on the Budget - Treasury

$billion

The cost of permanent promises

-100

-50

0

50

100

150

200

250

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350

400

Budget2000-01

Budget2002-03

Budget2004-05

Budget2006-07

Budget2008-09

Budget2010-11

Budget2012-13

Budget2014-15

Policy costs on taxes

Policy costs on expenses

Effect of the economy on the Budget

$billion

It’s a huge ask The improvements in future Budget deficits assume: • The Senate merely delays rather than denies further

savings of the size announced in last year’s Budget. We can run, but we can’t hide: policy needs to be part of the repair. The economy can’t and won’t get there by itself.

• That taxes on capital gains surge in a way that they haven’t for many years.

• That wage gains pick up, pushing people into higher tax brackets at a faster pace.

• And that China steadies and commodity price falls ease back to being moderate.

In isolation, each of those assumptions are brave. In tandem, they may rank as heroic.

What happens next? The old rule of thumb is that Australia wastes booms, but then rises to the challenge when adversity hits. Yet although the first part of that rule held true in spades this time around, it is less clear that the second part will. Australians are more willing to change their votes than ever before, meaning that the incentive for oppositions to oppose has been rising for some time. It is that which now poses a key challenge for Australia, as it means parliament has rising incentives to stifle what the government of the day is trying to achieve. But small targets may be an increasingly big problem.

Wages, HR

Wages in the slow lane Wages are in the slow lane, closely tracking price gains, but no more than that. That isn’t the result of trends in particular sectors or States. Although wage growth in WA has slumped to the lowest of all the States – rather less than half its 2008 peak – wage gains in WA in the past year (at 1.9%) is only a little below the national average of 2.3%. And nor should you be surprised to hear mining wage growth (at 2.4%) is also back close to the average. Yet the simple summary is that you could throw a handkerchief over all States and all sectors, with wage gains low across the board.

The economy is to blame – as is the past decade Some of that slowdown has its roots in an economy growing at below trend rates, and with unemployment creeping up. But there is a bigger picture adjustment underway as well, with a need for businesses to rebuild their cost competitiveness despite the helping hand proffered by a lower exchange rate. Nor will wage growth rebound any time soon – growth looks set to remain below trend for a while further, and those employers who were hit up for hefty wage gains in the past decade (mining, construction, the utilities, education and elements of both the Federal and State public service) are now mostly amid long and grinding campaigns of cost cutting.

What lies ahead Wage gains are likely to remain weak at least until 2016, when a recovery (to relatively modest wage gains) finally begins. Yet wage gains won’t bump along the bottom at record lows forever. Baby boomer retirement means that the pace of growth in Australia’s labour supply won’t be healthy, the urgency of the current phase of national cost cutting will slowly dissipate, while better news in housing construction will also boost wage gains. So although the recovery in wage gains is both modest and slow, it will occur.

Wage growth has dropped

2.5%

3.0%

3.5%

4.0%

4.5%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Wage Price IndexChange on year earlier

EBAs yet to slow to the same extent

Quarter TotalNo. of Employees Wage rise No. of Employees Wage rise No. of Employees Wage rise All currentagmts ('000) (% annual) agmts ('000) (% annual) agmts ('000) (% annual) agreements

Sep-12 43 52.1 2.7 1,998 149.0 3.7 2,041 201.1 3.4 3.7Dec-12 42 17.3 3.2 1,850 373.4 3.2 1,892 390.7 3.2 3.6Mar-13 32 21.5 3.7 1,308 118.9 3.6 1,340 140.5 3.6 3.6Jun-13 34 22.4 3.1 1,461 107.9 3.4 1,495 130.3 3.3 3.6Sep-13 46 119.4 3.3 2,168 262.8 3.4 2,214 382.2 3.4 3.5Dec-13 61 79.7 3.3 1,586 171.2 3.5 1,647 251.0 3.4 3.5Mar-14 44 69.8 3.7 1,195 112.3 3.4 1,239 182.1 3.5 3.5Jun-14 45 36.1 3.6 1,265 106.3 3.3 1,310 142.4 3.3 3.5Sep-14 39 42.7 3.9 1,475 180.9 3.4 1,514 223.6 3.5 3.5

Private sector Public sector Total

Source: Department of Workplace Relations Agreements database

24

More of us working longer

25

Supply slows, demand slows less …

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Total pop'n and working age pop'n (change on year earlier)

Total Working age

26

It’s a different decade

-3%

0%

3%

6%

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Output and employment (change on year earlier)

Real GDP Employment

While digital disruption is spreading

28 Get out of your own way: Unleashing productivity

0%

2%

4%

6%

8%

10%

12%

14%

1996 1998 2000 2002 2004 2006 2008 2010 2012Compliance sector workers Back office workers

Back office & compliance workers as a share of total employment

And ‘compliance’ changes shares of the workforce

Employment by industry

-2.0% -1.0% 0.0% 1.0% 2.0% 3.0%

Manufacturing

Farm

Mining

Information services

Transport

Construction

Recreational services

Wholesale and retail

Property services

Utilities

Public administration

Finance and insurance

Business services

Education

Health

Average growth rate, 2015 - 2019

Average industry employment growth, 5 year average

State employment growth

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

Australian Capital Territory

Tasmania

South Australia

New South Wales

Victoria

Queensland

Western Australia

Northern Territory

Average growth 2014-15 to 2019-20

Average growth 2009-10 to 2014-15

Employment by occupation

0% 1% 1% 2% 2% 3% 3% 4%

Technicians and Trades Workers

Machinery Operators And Drivers

Labourers

Clerical and Administrative Workers

Managers

Sales Workers

Professionals

Community and Personal Service Workers

Occupational employment growth, 5 year average

Average growth rate, 2015 to 2019

And Budget woes may weigh on education wages

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102

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Education wages relative to the all industry average

The Senate votes against higher education reforms

The Feds’ higher ed reforms didn’t make it through the Senate, even though they’ve been trimmed back to focus on fee deregulation rather than funding cuts. (The support of six crossbenchers was needed for it to pass.) There were ‘no’ votes from the Labor party, the Greens and five of the eight cross benchers. Proposed measures re pricing and HECS loans generated considerable concern. But the absence of any certainty about ‘where to next’ will increasingly generate concerns of its own.

2015-16 Budget: Move on, folks

Nothing to see here: • The key point from the 2015-16 Budget is what didn’t

change: the forecasts still assume that measures from last year (both savings and deregulation) will go ahead as previously planned.

• Beyond that: – The National Collaborative Research Infrastructure Strategy

received $150m – Balanced by a $150m cut to the Sustainable Research Excellence

Initiative

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