JP Morgan’s chief economist for Australia, Stephen Walters, has delivered a nice sermon on why real incomes in Australia must fall. From the AFR:
An unprecedented surge in the terms of trade – our international purchasing power – caused Australia to undergo one of the largest, most beneficial adjustments in our economy in more than a century.
National income soared, the jobless rate plunged, and the high prices paid for our major export commodities triggered the biggest investment boom we have seen… That’s the good news.
The bad news is that because of the boom, Australia is now a high-cost producer, partly because of our high labour costs. Also, the terms of trade now is falling… so many of these beneficial effects have gone into reverse…
How this post-mining-boom adjustment plays out is a key determinant of our medium-term economic future…Sub par growth will continue to put pressure on the nation’s finances…
Ultimately, there are profound long-term adjustments that are needed to restore Australia’s competitiveness. One would be a sustained fall in the real exchange rate…The remaining lever that can be pulled is the level of real wages…
…Failure either of the real exchange or real wages to shift materially lower would, over the years, cause Australia to continue to lose jobs, and the closure of other household name companies.
This analysis is spot on.
Thankfully, Australia is already undergoing these adjustments. The Australian dollar has devalued significantly (albeit it has further to run):
And income growth is slowing, as shown by the next chart. While real per capita income growth averaged an extraordinary 2.8% over the 2000s, thanks to the once-in-a-century terms-of-trade boom, so far this decade it has averaged just 1.0%, with the trend clearly down:
Moreover, the Australian Treasury forecasts that average per capita income growth will halve over the next decade to the lowest rate of growth experienced in 50 year as the terms-of-trade unwinds and the employment-to-population ratio falls:
In short, the strong real income gains experienced over the past decade were an aberration, juiced by the once-in-a-century surge in Australia’s terms-of-trade. Income growth going forward will be anemic, which is required to restore Australian competitiveness. Otherwise, Australia faces the prospect of more industry closures and rising unemployment.
