The Australian economy will face a great deal of pressure in the next few weeks. It will require a great deal of skill, diligence and nerve on the part of those in power to ensure that it does not succumb to pressure that will result in many Australians suffering economic hardship. There are several inter-related points of pressure. The most obvious is the relationship between the US dollar and the Australian dollar. Our currency has fallen considerably in the past few months against the US dollar. There is some evidence that the fall has halted, but one could not be too confident about it. The saving grace is that other currencies have also fallen against the US dollar, some by more than ours. It means that our position against the currencies of other major trading partners – the euro, yen and New Zealand dollar — has held up. Also currency changes usually self-correct or at least find a new equilibrium. The price of US exports will go up so Australians will shun them and the price of Australian goods in the US will go down, making them more attractive.
The next pressure is the price of oil. It has the potential to flow through all areas of the economy as transport costs get passed on to consumers.
These two pressures have resulted in price increases, but their full effect has not been reflected in official inflation figures. However, the one-off inflationary effect of the GST has sounded in official rates with the latest figures out this week. Those figures revealed a lower rise in inflation than was expected. Nonetheless combined with petrol and import prices, there is at least an anecdotal and psychological effect among consumers and employees. It is fairly apparent that the price effect of the GST has been more than compensated for by tax cuts and changes to welfare. The danger is, however, that many will not see it that way. Rather they will see the spike in the consumer price index and point to petrol and import price rises and rises in mortgage repayments due to recent small rises in interest rates. They will then argue for wage rises to compensate. It is important that any wages rises are tied to demonstrated productivity rises and are not given because of the rise in the GST-related CPI or because of international circumstances. To do so would fuel inflationary pressure. That in turn would lead the Reserve Bank to raise interest rates. That in turn would result in lower buying power and probably to some businesses faltering and therefore lower employment growth. It is also important that executives lead by example. They should show restraint, too. A beneficial result of the changes to corporate law to force disclosure of executive pay has been some exercises in shaming that might result in more restraint.
One of the great difficulties managing the Australian economy has been that the Government does not only have to deal with private enterprise doing its thing. There are three other significant independent sources of power over the economy: the Reserve Bank, the Arbitration Commission and the state governments. These, particularly the last two, can undo good work elsewhere.
The inflation caused by the GST, petrol and the high US dollar would be seen by both the commission and the Reserve as one-off events that should not justify rises in wages or interest rates of their own accord. If either of these bodies miscalculates the effects of what they do will feed off each other to the detriment of Australians generally.
Australians should cop oil, GST and high-cost US imports as one offs with might lower living standards slightly in the short term but are not worth jeopardising Australia’s fundamentally sound economic outlook.