AUSTRALIAN ECONOMIC DEVELOPMENTS
This week the distribution of Australia’s income –as opposed to its growth –came under the spotlight, with the release of a landmark report on inequality trends in Australia by the Productivity Commission. The Commission’s key finding is that Australia’s “unprecedented 27-year period of uninterrupted economic growth” since 1991 has been accompanied by relatively stable income, consumption and wealth equality. Australia is close to the OECD average for income equality and relatively more equal (eighth best) for wealth equality. Australia’s progressive tax and transfer systems have worked well to equalise after-tax incomes and consumption.Importantly, living standards have improved for households in all income deciles and for each generation (relative to previous generations at the same age). Income and wealth mobility are also relatively good in Australia over a lifetime, although around 9% live in relative poverty and 3% live in ‘entrenched’ (long-lasting) poverty at any given time. These poverty figures have not improved in 30 years and require better responses. How best to improve Australia’s poverty and equality rates from here? The Commission says “policies, institutions and political environments” can all help, but “among the various forces acting on inequality and poverty, the one constant that matters is having a job.”
Income is one of eleven indicators of national well-being that the OECD compiles in its annual Better Life Index. Research published by the OECD last week indicated that of these 11 indicators,the most important factors forwell-being globally are (in order of importance) health, life satisfaction, education, work-life balance and safety. Employment comes in at 8th and income at 9thfor their importance to well-being (behind environment and housing). Differences in rankings were observed across demographic groups and locations. Australians ranked their most important factors for well-being as (in order of importance) work-life balance, health and life satisfaction. This indicates that on average, work-life balance is considered to be more important to personal well-being in Australia than income. And it is more important to well-being in Australia than it is in other countries. In 2017 (latest year available), Australia ranked third overall in the OECD Better Life Index, behind Norway and Denmark but ahead of Sweden and Canada.
Looking ahead at local business conditions, the outlook for private sector capital expenditure (CAPEX) was the most significant piece of new information released this week. This indicated that Australian business invested $118.9bnin 2017-18 and plan to invest $103.2bnin 2018-19.Early estimates of future CAPEX have significantly undershot actual CAPEX in recent years, so these estimates for 2018-19 are likely tolift over the coming quarters.Meanwhile the number of monthly building approvals fell in July, mostly offsetting an end-of-financial-year spike in June.
Australian inequality is ‘average’ and has been stable for the past 30 years
This week the Productivity Commission released a landmark report on inequality in Australia. The Commission noted that globally, economic growth in developing countries has contributed to “an evident reduction in global income inequality and poverty since the late 1980s, .... At the same time, however, there has been rising inequality within many developed countries.” Focussing on the period since Australia’s last recession in 1991, the PC found that Australia’s experience has been better –and rather unique-among developed economies. Since 1991 in Australia:
- Pre-tax disposable income inequality has risen very slightly on some but not all measures. It is around the average for all OECD countries (as measured byincome Gini coefficients);
- After-tax income and consumption are more equal than pre-tax income because “Australia’s progressive tax system and highly targeted transfer system substantially reduce income inequality. Income tax and government transfers have typically lowered the measure of overall income inequality (the Gini coefficient) by 30%, an equalising effect that far outweighs the overall increase in the measure since the late 1980s. This equalising effect has fluctuated over time, but overall there has been no material change in the past thirty years”;
- “wealth distribution in Australia ... is more unequal than income or consumption, [but] Australia’s wealth distribution remains less skewed than in other countries. Among 28 OECD countries, Australia ranks eighth most equal, as measured by the Gini coefficient of wealth”;
- living standards have significantly improved for the average Australian household in every income decile over the past 27 years, but with varying rates of growth in particular years. In the most recent decade, “the mining boom was a period that favoured high income earners and capital income, lifting measures of inequality. In contrast, the post Global Financial Crisis period has benefited lower income groups, despite weak overall growth in labour income”;
- “on average, ... each new generation has earned more income than the last at a given age, and reaches the same level of income earlier in life”;
- economic mobility is high in Australia. “Almost everyone moves across the income distribution over the course of their lives. Over a 16 year period, the average Australian was classified in five different income deciles; .... A lower, but still significant level of mobility was also apparent across the wealth distribution. This highlights the fluid nature of income and wealth”;
- About 9% of people experienced relative income poverty in any given period, but most moved on. Only “3% of households were stuck in one of the bottom two deciles throughout the period. Stickiness at the ends of the distribution is indicative of some entrenched inequality.”; and
- “policies, institutions and political environments” can help alleviate poverty and inequality, but “the one constant that matters is having a job.”
The PC’s report is available online here: www.pc.gov.au/research/completed/rising-inequality.
CAPEX fell in Q2 2018
The latest ABS estimate of private sector investment (CAPEX) indicates total CAPEX fell by 2.5%q/q in Q22018 and was broadly stable over the year (+0.4% p.a., inflation-adjusted and seasonally-adjusted). CAPEX was driven lower in Q2 by lower spending on both ‘building & structures’ (-3.9% q/qbut +6.9% p.a.) and ‘equipment, plant & machinery’ (-0.9% q/q and 4.7% p.a., chart 1 and table 1). Expenditure on equipment, plant and machinery is expected to detract slightly from GDP,which will be released next week.
The CAPEX survey captures around 60% of total business investment. It excludes spending from industries such as agriculture,health and education. Among the industries that are included, mining CAPEX fell by the most -7.2%q/q to $8.3bn-which was the lowest quarterly mining CAPEX since Q4 2007.This reflected a large fall in LNG-related construction that outweighed a slight rise in iron ore and other mining CAPEX. Mining CAPEX currently accounts for less than one third of total CAPEX (around its long-run average), down from its peak of 59% in 2013.
In the non-mining sectors, ‘other selected industries’ (including retail, wholesale, transport, utilities and construction industries) fell by 1.0% q/q but rose 6.1% p.a. in Q2. It accounted for 63% of total CAPEXin Q2.
Manufacturing capex increased by 2.7% q/q to $2.4bn in Q2of 2018. Manufacturers’ CAPEX on machinery, plant and equipment rose by 3.9% q/q in Q2 while spending onbuildings and structures rose by 0.9% q/q. Capacity constraints have been evident in the Australian PMI for most of 2018.It appears that manufacturing firms seem to be more confident in investing for expansion, reflecting recently buoyant business conditions.
Across the states, the distribution of CAPEX continues to revert to its pre-mining-boom pattern (chart 3). NSW accounts for more than a quarter of all CAPEX captured in this survey, with the state’s CAPEX rising by 2.0% q/q and 11.3% p.a. in Q2. CAPEX also rose in Queensland (+3.7% q/q and 2.7% p.a.)and South Australia (+29.7% q/q and 32.7% p.a.,from a smaller and more volatile level).
CAPEX was weaker in Q2 in Victoria (-5.4% q/q and -1.4% p.a.) and WA (-7.5% q/q and -10.8% p.a.). Tasmanian CAPEX fell 7.0% q/q but was up 31.4% over the year, from a typically low level.
Non-mining business investment outlook remains positive for 2018-19
The latest ABS CAPEX data release included the seventh (and final) estimate of annual CAPEX in 2017-18 and the third estimate of plans for annual CAPEX in 2018-19. The seventh (and final) estimate of business CAPEX for 2017-18 indicate that Australian businesses invested a total of $118.9bn, up4.0% from2016-17 (in nominal terms). Non-mining CAPEX rose by 9.5% p.a. to $82.9bn in 2017-18. This represented a significant step up in investment activity, after relatively weak nominal growth of just 1.8% p.a. in 2016-17. It included higher CAPEX spending in both manufacturing (+6.5% p.a.) and businesses outside mining and manufacturing (+9.9% p.a.). In contrast, mining investment fell by a further 7.0% to $36bn in 2017-18 (table 2).
After applying a suitable realisation ratio (based on businesses’ average ‘realisation ratio’ of the past five years), the latest (third) estimate of business CAPEX plans for 2018-19 indicate that Australian businesses plan to invest$103.2bn, in nominal raw dollars. This is an increase of $6.5bn from the second estimate for 2018-19 but is $15.7bn lower than the actual amount spent in2017-18 (see above and table 2). It is also $1.1bnlower than the equivalent (third) estimate for 2017-18. These early estimates of annual CAPEX tend to be lower than the actual spending levels that eventuate. There is often a greater degree of underestimation when the economy is improving, as it has been over the past two years. This suggests CAPEX is likely to turn out stronger in 2018-19 than this third estimate implies, providing a further boost to activity and productivity across the economy.
Across industries,this third estimate of CAPEX intentions for 2018-19 suggests another fall in spending by the mining and manufacturing sectors (in nominal dollars and based on realisation ratios for this third estimate over the past five years). Mining CAPEX is estimated to fall a further 21.0% to $28.4bn and manufacturing CAPEX is estimated to fall by 6.7% to $8.8bn in 2018-19.
CAPEX by ‘other selected businesses’ is expected to fall a relatively modest 0.2% p.a.to $73.3bn, slightly lower than the record $73.4bn in 2017-18, in nominal terms (see table 2 and chart 4). This confirms the RBA’s recent expectations for non-mining business investment to “continue to grow over the forecast period, but at a more moderate pace than over the previous year”. The third estimate for 2018-19 suggests that non-mining capex will be 1.0% lower than in 2017-18.As noted above however, the early estimates of annual CAPEX tend to be lower than actual spending.
Residential building approvals fall in July 2018
Monthly residential building approval numbers fell by 5.4% m/m and 5.6% p.a. in July (seasonally adjusted). Private sector ‘other dwellings’ approvals (apartments, flats and townhouses) fell by 6.6% m/m, while private sector ‘house’ approvals fell by 3.0% m/m. ‘Other dwellings’ approval numbers are extremely volatile month to month due to large one-off developments, so the ABS ‘trend estimates’ provide a better guide to underlying behaviour in these data. Looking beyond this heightened monthly volatility, the total number of approvals has fallen to around 18,000 approvals per month but it is still elevated by historical standards(trend). Under this headline figure, housing approvals fell by 0.9% m/m and0.3% p.a.(trend). Approvals for “other dwellings” fell by 1.8% m/m and 4.8% p.a. in July(trend) (chart 5).
The trend in slowing residential building approvals reflects local regulatory constraints on investor finance,(modest) falls in house prices and building industry cycles. Building approvals typically ‘lead’ building activity by 6 to 12 months, so these recent trends suggest that, although the residential construction cycle may have peaked, residential construction activity will remain at a high level in 2018-19, supported by record low interest rates(notwithstanding recent increasesby some major banks) and strong population growth.
