The Reserve Bank governor has issued his strongest call yet for bigger pay rises, telling a parliamentary committee that weak wage rises are a bigger threat to the economy than falling house prices.
- RBA governor says price falls “put our housing markets on more sustainable footings”
- Dr Lowe calls for minimum wage increase to continue being above 3 per cent
- The IMF and RBA agree that the Federal Government should spend more on infrastructure to support economic growth
In the bank’s semi-annual appearance before the House of Representatives Economics Committee, Philip Lowe played down recent steep house price falls in Sydney and Melbourne, saying they should not have come as a surprise.
Dr Lowe and the other Reserve Bank officials present attributed the rise in prices over the past decade to a rapid increase in population growth that was not matched by an increase in housing supply.
“The decline in prices we’re seeing now is the supply response that took place almost a decade too late,” Dr Lowe argued.
However, he dismissed concerns amongst many analysts that the pendulum had swung too far the other way and the big east coast cities were now oversupplied, especially with apartments.
“I don’t see signs of widespread overbuilding of dwellings in this country,” Dr Lowe responded.
“I don’t see signs of fundamental disequilibrium between supply and demand now in the market, in some parts of Sydney maybe there are a few too many apartments but, if you look at Sydney as a whole, I don’t think we’ve built too many dwellings.”
Instead, the RBA governor talked up the positives of falling house prices, arguing that “as prices come down, new households can form.”
“This adjustment in the housing market is not expected to derail the economy,” he said.
“It will put our housing markets on more sustainable footings and allow more people to purchase their own home. So there is a positive side too.”
Stagnant wages pose bigger threat to economy
Rather, Dr Lowe saw stagnant household incomes is a much bigger threat to consumer spending, and thus to the 60 per cent of the economy based on it.
“Aggregate household income used to grow at 6 per cent, it’s growing sub-3,” he told the MPs on the committee.
“That’s a big difference, and you accumulate that over three or four years and income is 8, 10 or 12 per cent lower than it otherwise would have been.
“Many people borrowed assuming their incomes would grow at the old rate and they haven’t.
“They’re having more difficulty, they’ve got less free cash and so they can’t spend, so this is why I’ve put so much emphasis on the need for a pick-up in wage growth.”
Dr Lowe told the committee he has been using speeches to try and lift wage expectations, while the RBA has been keeping interest rates low and stable for an extended period of time to relieve the pressure on households.
The RBA governor said, while the strategy seems to be working — with unemployment down at 5 per cent and wage growth starting to pick up from recent lows — he could use a bit more help from the Fair Work Commission and employers.
Fair Work last year awarded a 3.5 per cent pay rise for those on the minimum wage and linked awards, and Dr Lowe said that was a “sensible and right policy” and a similar increase this year “makes a lot of sense”.
“If workers get their normal long-run share of that [productivity increase] then their real wages should rise by 1 per cent a year,” he said.
“So 2.5 per cent for inflation plus 1 per cent at least for productivity growth would give 3.5 per cent wage growth, so for me that’s the best steady state.”
The latest wages figures, out this week, showed pay packets grew an average 2.3 per cent last year.
Dr Lowe also said unemployment could fall further below its current level of 5 per cent without risking a dramatic rise in inflation and the threat of interest rate increases.
“I think this country can have an unemployment rate close to 4.5 per cent without wage growth causing problems for inflation.”
Economy ‘a hell of a lot weaker’ before RBA prints money
The possibility of the Reserve Bank undertaking a money printing program similar to the US Federal Reserve was raised last year in a speech by deputy governor Guy Debelle.
When he was asked at what point the RBA might consider such a response, Dr Debelle said it would have to be an extreme situation, where other options had run out.
“It’s a scenario where the Australian economy is a hell of a lot weaker than what it is today,” he responded.
“That’s not where we are now and it’s not where we expect to be.”
Dr Lowe said the Reserve Bank would expect the Federal Government to step in with tax cuts or increased spending well before the RBA had to consider printing money.
“Just to be clear, we weren’t flagging we were thinking of doing this,” he told MPs.
“There are other possibilities that I think it would be useful to explore before that, including a fiscal stimulus in this scenario where the economy is very weak and the exchange rate would adjust I would expect, which would help as well … the exchange rate is the great stabiliser.”
In its latest update on Australia, the International Monetary Fund (IMF) agreed that the Federal Government may need to open its purse strings if the economy slowed further, given that official interest rates are already at a very low 1.5 per cent and do not have much further to fall.
“Given limited conventional monetary policy space, discretionary fiscal stimulus may need to complement monetary easing in the event downside risks materialize,” the IMF noted.
“Most directors noted that Australia’s substantial fiscal space could be utilised for further increases in high-quality infrastructure spending to boost potential growth.
“At the same time, a number of directors noted that the fiscal space could be preserved as a buffer to deal with shocks.”
The IMF also appeared to hint at some kind of stimulus directed at home buyers.
“While the housing market correction is helping housing affordability, continued housing supply reforms remain critical for broad affordability and to reduce macrofinancial vulnerabilities,” it added.
“Directors generally encouraged the authorities to explore, where possible, alternative and effective non‑discriminatory measures for buyers.”
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