Since the mining boom ended, and jobs in the manufacturing industries were recently cut, our economy has struggled to replicate its wealth and success that it had during the mining boom.
With inflation rates, level of economic activity and interest rates all falling in recent years and remaining relatively static, recent slowing of wage growth coupled with the slowing of the retail industry has potential to be detrimental to the overall health of our economy, and is just another set of factors that are adding up to Australia’s precarious economic position.
Alarmingly low wage growth and interest rates
Currently interest rates are low 1.5%, which is lower than the RBA’s target cash rate of 2-3%. This low cash rate signifies that the RBA’s aim is to stimulate spending and boost economic activity. However, despite a .4% increase in retail sales in January; which would indicate that the incentives for consumers to spend provided by low interest rates is working; many experts such as RBA governor Philip Lowe believe that this increase is somewhat deceiving, as he believes households will see their disposable income decrease with these declining rates in wage growth. He believes that as families begin to discover this trend, they will be even more reluctant to spend their money, and that the decreasing consumer confidence and reduced disposable income will essentially counter and overpower the incentives to spend more that come with low interest rates, ultimately leading to a slow in economic activity and goods traded in the economy.
On the contrary, Australian Retailers Association executive director Russell Zimmerman claims that the new Sunday rate penalty cuts (talked about by Matt in a previous article) will provide longer trading hours and subsequently and overall increase in quantity in goods traded in particular industries where the rate cuts applied (such as retail and fast food).Although this new policy is aimed to counter slowing economic activity, I still feel like it won’t impact the selected industries and the economy hugely, as the rate cuts are not huge, and even though I believe that the cuts are a smart economic decision, I personally believe that this is merely a small step in the right direction, and that it will take much more for Australia’s economic figures to start looking more positive again.
The many compounding factors are currently effecting our economy are all hugely complex, and looking at this from a macroeconomic standpoint, it is very difficult for me to come up with any solutions.
For example, measures such as decreasing cash rates further will have adverse effects on other parts of the economy and a decreasing cash rate is seen as far from ideal as the RBA’s target is 2-3%, and is ultimately unsustainably low, And although many younger workers will feel the impact of the Sunday wage cuts, I do think is a small measure that is a smart way to boost the economy, but ultimately I think the issues with low wage growth have to be addressed somehow. However the issue with simply raising wages is that will then have negative effects on many industries, as cost of production increases, and in the industries where wage cuts occurred, wage hikes to try to increase disposable income and economic activity will counter the benefits from the wage cut, making this new policy useless.
Overall it is very hard to simply figure out how to fix the economy, and i think it will take a long time until we start to see our economy thriving once again.