The Economic Outlook For 1992

The Economic Outlook For 1992

Stephen de Rozairo, Research Offficer, ACTU on the economic outlook for 1992 with a look at the governments economic policy framework (Accord), the Australian economy from 1983-1989, and employment growth.

Introduction

At this point in time it is easy to forget that the Accord has been in place for over nine years. Its rationale was founded on the need to bring about recovery from the stagflation (i.e. high unemployment and inflation with low growth) of 1981-83, the legacy of the last Conservative administration.

 

In a short paper it would be impossible to adequately outline the achievements of this period in partnership with the government. But some key points can be highlighted which are relevant to this discussion.

 

 

  • The government’s economic policy framework (including the Accord) drove growth in the economy from 1983 to 1989, with a short slowdown over 1986 associated with the current account and foreign debt problems.

 

 

 

  • However employment growth was continuous throughout this period, with the unemployment rate falling from over 10% to under 6% despite the considerable increase in those seeking employment [especially married females seeking work].

 

 

 

  • A boom took place over 1987 to 1989, with considerable growth in investment, but quickly led to rapidly rising imports and inflation.

 

The Current Policy Dilemma

The issue of macroeconomic management is always a delicate and complex one. The recession we have endured and the return to high unemployment rates we have witnessed are regrettable – policy obviously overshot the mark.

 

The fact is that the government attempted to engineer a slowdown in growth over 1989-90, in order to bring the current account and prices growth under control once more, but fine tuning is inherently hard.

 

Fiscal policy setting were already tight with slow growth in public spending and three consecutive budget surpluses, tax increases [even to the higher income groups] were not considered an option since the perception would have been one of a u-turn. The only instrument left was monetary policy, but interest rates were held too high and for too long with the consequent impact upon the level of activity and demand.

 

It should be noted that Australia was not the only economy in recession, New Zealand has been since the late 1980s and most of the OECD nations currently are or soon will be experiencing a slowdown. [Japan and Germany are the more recent victims of slower economic conditions.] Thus our circumstances are to some extent part of an international phenomenon.

 

In addition to weaker international prospects, there were other factors at work during the last two years that have compounded our slower economy.

 

These include:

 

 

  • the onset of drought and its impact on the farm sector
  • very subdued levels of consumer and business confidence

 

The One National Statement

The One Nation statement released in late February by the Prime Minister was a package for recovery. As a whole, the measures contained therein deliver an immediate stimulus to demand as part of a medium-term program to overhaul Australia’s economic and social infrastructure with clear vision for its reform.

 

During 1991 we had the March Industry Statement which was nothing to do with recovery and all to do with tariffs, the November Statement included a number of steps in the right direction in terms of training and active labour market programs, but again little in terms of achieving faster growth. By formulating its current economic strategy the government has accepted that you start with the proposition that as a nation we must aim for growth around 4.5% over time, in order to absorb new entrants into the workforce and reduce the rate of unemployment by creating jobs in a sustainable way, which is the Australian union movements policy position as adopted at the biennial. ACTU Congress last September in the Charter for Jobs. The challenge, having accepted the goal, is to achieve higher growth rates and sustain them.

 

In that regard the government has proposed a number of far reaching plans to reduce structural impediments to growth whilst improving the prospects for a low inflation environment and increasing competitiveness.

 

The major proposals include:

 

(i) A competitive Australia requires competitive infrastructure. We need an effective national rail highway with quality links between it and our roads and ports, both air and sea. We must have safe effective roads and highways. These needs are recognised and addressed in the Prime Minister’s package with additional spending of more than $1 billion over 2-3 years.

 

(ii) The commitment to legislation for the Superannuation Guarantee Levy announced in the August 1991 Budget. [This will boost overall national savings, as supported by RBA analysis of Edey, Foster and MacFarlane in December last year, and underpins a comprehensive retirement incomes policy as the population ages and the demand for fully government funded pensions weakens the purchasing power potential of such income support.

 

(iii) Competitiveness in world markets ultimately rests in the margin which quality brings, and a consistent edge in quality must ultimately be found in our workplaces. The Government’s offer to assume full funding for TAFE with additional funding of $720 million over 3 years and establish a first rate system of Institutes of Vocational Education, presents us with a rare chance. It could transform our approach to skills formation and link the nation’s workplaces with is education infrastructure from schools through to universities.

 

(iv) Related to this is the Carmichael Report, on Vocation Certified Training, which attempts to target training for those young people for whom the current systems have failed, and raised broader issues of education/training, institutional reform, greater vocational options and competence as a system of wage determination.

 

Australian industries must invest for growth in world class plant and equipment if we are to produce goods and deliver services competitively on world markets. The Keating package of tax reform and industry development measures will boost investment and help win export markets via such measures as:

 

 

  • investment allowances for certain projects
  • export support measures
  • pooled development funds
  • streamlined approvals process for major projects
  • special measures for the TCF sector in adjusting
  • other development support for small business, rural, tourism and minerals.

 

Economic Conditions In 1992-93

The outlook for the latter half of 1992 and through to 1993 is one of:

 

 

  • slow steady growth, with GDP excepted to be around 43/4 % due mainly to a recover in private final demand [augmented by some public final demand growth].

 

 

 

  • Recovery in consumption due to the pick up in household disposable income reflecting jobs growth.

 

 

 

  • Employment is anticipated to trend upwards over 1992 [21/4 % over 1992/93]. This is consistent with an unemployment rate of 91/2 % by mid 1993. Labour market asymmetries mean that the rapid increase in unemployment since mid 1991 will not so quickly be unwound. The pace of job growth will also reflect the substantial restructuring which is proceeding across all major industry sectors. However, the more competitive and outward-focussed economy which this restructuring will generate, bodes well for sustained employment growth and falling unemployment rates thoughout the mid 1990s.

 

 

 

 

  • Inflation will continue to be moderate, picking up to around 3% at the most over 1992/93.

 

 

 

  • There are strong signs of a productivity dividend resulting from the massive structural changes which have occurred over the last nine years. A recent study of large industrial companies by McIntosh Brokers’ Analyst David Lansley confirmed that even in 1989-90 and 1990-91 the AWAARD Restructuring changes were having a positive influence on productivity growth of around 6.8% per annum on average. [But for these firms the gains will not be fully realised till sales recover to past peaks. In other words we need growth to complement productivity increases.]

 

 

 

  • In welcoming “One Nation” and its focus on jobs through low inflationary growth, the ACTU Executive agreed to defer until later this year the National Wage claim, which was planned to be lodged in the March quarter of 1992. This agreement, in context of the Government’s support for a continuing role for National Wage cases, renews the broad understanding on wages policy established during the nine year old Accord partnership.

 

 

 

  • Wages growth will continue to be predictable and moderate – supporting a positive investment environment in a way which investors have not faced from interest, exchange rate and energy costs since 1983.

 

 

 

  • Moreover, by affirming an Accord agreement to keep Australian inflation outcomes in line with those of our major trading partners, a broader commitment to competitiveness has been forged. Not since the 1960s has Australia experienced economic growth with inflation rates in the vicinity of its trading partners. This evolution of the Accord understanding - to go beyond aggregate wage outcomes alone and embrace inflation targets generally – is a clear sign of a mature relationship.

 

 

 

  • Further declines in interest rates were due to inflation falling much faster and staying lower for longer than people believed – especially the money market cowboys in the bond market. [Indeed in terms of adjusting to the lower inflation it seems that trade unions and the labour market have adjusted much more quickly than the bond market.]

 

 

 

  • A stable exchange rate consistent with expectations for our terms of trade.

 

 

 

  • The major risk in recovery is the current account deficit and resulting foreign debt – again the extent to which we can guard against imports requiring slower growth is through the productivity dividend and microeconomic reform.

 

 

However, a recent study by Professor Barry Hughes of CS First Boston suggests that the lower interest rates in an increasingly smallest net income deficit of $5 b per year, ensuring that this CAD risk is minimal over the next two years at least.

Conclusion

The One Nation Statement combined with declining inflation and low interest rates suggests that 1992/93 will be a full year of sustainable recover. Growth is expected to be slow and steady. Faster sustainable growth providing greater employment opportunities would be welcome.

 

The extent to which these growth rates can be sustained over time depends upon industrial development, microeconomic reform, maintaining high productivity growth and keeping inflation close to our major trading partners.

 

Growth prospects are higher than if One Nation did not occur, and more importantly they would be infinitely greater than the Opposition would inleash upon us in their policy proposals.

 

Stephen de Rozairo, Research Officer, ACTU. Paper presented to the Joint Lloyd Ross/ACIRRT Union Forum, University Sydney, 4 May 1992

 

Please note that the views expressed are the personal thoughts of the author alone and do not necessarily represent the collective view of the Australian Council of Trade Unions