Vital Signs: dismal wages growth makes a joke of budget forecasts

Pay packets rose just 0.5% in the first quarter.
bradleypjohnson/Flickr, CC BY-ND

Richard Holden, UNSW

Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.

This week: investor loans continue to rise, unemployment ticks down, wages growth remains distressingly low, and consumers are unconvinced the budget will improve their financial situation.

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Now that Australia’s two major political parties (and the Greens) have decided that robbing banks is legitimate public policy, we return our focus to how the Australian economy is actually functioning.

ABS data released Monday showed that investor housing loans rose slightly, up 0.8% on the previous month. The really interesting figures on this front are still to come, since the Australian Prudential Regulation Authority announced tighter macro-prudential measures – especially on interest-only loans – at the end of March. There are already some anecdotal suggestions that these have started to dampen investor demand, but there is no proper evidence yet. The next round of ABS housing finance data will certainly provide some clues.

The ABS also reported this week that first quarter wage growth was distressingly low, with pay packets rising just 0.5%. That puts private-sector annual wages growth at 1.8%. The main concerns here are, of course, for workers struggling to get by and the fact that rising levels of income inequality are not being dented by robust wage growth.

Added to this, however, is the impact of low wage growth on the budget, and the economy more generally. The RBA has pointed out in recent months that around one-third of mortgage holders have less that one month’s repayment buffer. As the cost of living keeps rising, but wages don’t, people with close to no wiggle room get squeezed more and more.

Last week’s budget, and the forecast return to surplus in 2020-21, was predicated in no small part on very robust wage growth.

On budget night I wrote that these wage growth assumptions were bullish and unlikely to eventuate. 3% going to 3.75% annual wage growth looks really aggressive against a stagnating 1.8 – 1.9% (counting the public sector’s slightly stronger growth). When wage growth is lower than it has been since the mid 1990s, how can one forecast with a straight face that the growth rate will double?

Ratings agency Standard & Poor’s certainly understands this. It almost grudgingly reaffirmed Australia’s AAA credit rating this week, but cast doubt on the projected return to surplus, saying “budget deficits could persist for several years, with little improvement, unless the Parliament implements more forceful fiscal policy decisions”.

Figures released Thursday showed the unemployment rate fell from 5.9% to 5.7%. This is seemingly good news, although this ABS series has been notoriously unreliable in recent times.

The workforce participation rate was steady at 64.8% – and this may be a better and more relevant measure of short-term fluctuations in employment.

There was also a continued shift to part-time employment. Total jobs were up 37,400, but people in full-time work fell by 11,600 and the number of part-time jobs was up 49,000.

Consumer confidence weakened a little in May according to the Westpac-Melbourne Institute Index. It was down a point to 98.0 in May (recall that for indices like these 100 is the level at which optimists and pessimists are in equal supply).

Westpac chief economist Bill Evans said:

Respondents’ confidence in housing and the outlook for house prices deteriorated sharply, while the assessment of the budget around the outlook for family finances was decidedly weaker.

And why wouldn’t it be? The budget contained essentially nothing to address the housing affordability crisis, further fuelling concerns that there will be a messy correction to prices.

Meanwhile, the government’s best ideas for how to grow wages and incomes were to waive a white flag about spending restraint, whine about how the Senate won’t pass their legislation (“this is a Senate tax”, said the treasurer on budget day), and launch a populist attack on our five largest banks.

And that attack – the bank tax – will be passed on to consumers, just like the last increase in regulatory capital required by APRA.

So the government raised the taxes of most Australians and blamed the cross-bench. That doesn’t fill me with confidence. And it seems I am not alone.

Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

This article was originally published on The Conversation. Read the original article.

Republic of Somalia’s jihad-related chaos and violence

In a report that comes as no surprise to many counterinsurgents, officials from the United Nations released a sharp rebuke of war-torn Somalia’s government. In its report, the UN officials called the Somali security and federal transitional government "ineffective, disorganized and corrupt" despite international assistance, reports Law Enforcement Examiner.

"Despite infusions of foreign training and assistance, government security forces remain ineffective, disorganized and corrupt — a composite of independent militias loyal to senior government officials and military officers who profit from the business of war and resist their integration under a single command," the report reads.

"Efforts to restore peace and security to Somalia are critically undermined by a corrosive war economy that corrupts and enfeebles State institutions… Commanders and troops alike sell their arms and ammunition – sometimes even to their enemies. Revenues from Mogadishu port and airport are siphoned off. Some government ministers and members of parliament abuse their official privileges to engage in large-scale visa fraud, smuggling illegal migrants to Europe and other destinations, in exchange for hefty payments," states the UN report.

According to officials, the extensive report should be released in New York City this week so members of the UN Security Council may peruse the contents.

"During the course of the mandate, government forces mounted only one notable offensive and immediately fell back from all the positions they managed to seize," the report read. "The government owes its survival to the small African Union peace support operation, AMISOM, rather than to its own troops."

During the 1990s, a group of Saudi-educated, Wahhabi militants arrived in Somalia with the aim of creating an Islamic state in this dismal African country. Also, the renowned Al-Qaeda established an operations base and training camp. They would routinely attack and ambush UN peacekeepers. In addition, they used Somalia to export their brand of terrorism into neighboring Kenya.

Leading members of Al-Qaeda continue to operate, mostly in secrecy, in Somalia and have built up cooperation with some of the warlords who control food, water and medicine. And the people of Somalia starve, mourn and die.

Since 2003, Somalia has witnessed the growth of a brutal network of Jihad with strong ties to Al-Qaeda. In fact, when the US forces faced a bloody battle in 1995 during what became known as the Black Hawk Down incident, it was Al-Qaeda joining with a local warlord who killed and wounded US special operations soldiers.

Somalia has been without a functioning national government for 14 years, when they received their independence from Italy. The transitional parliament created in 2004, has failed to end the devastating anarchy. The impoverish people who live in the ruined capital of Mogadishu have witnessed Al-Qaeda operatives, jihadi extremists, Ethiopian security services and Western-backed counter-terrorism agents engaged in a bloody war that few support and even fewer understand.

In an incident that gained American press attention, Somali-based terrorists armed with rocket-propelled grenades launched an unsuccessful attack on Seaborn Spirit as it rounded the Horn of Africa with American, British and Australian tourists on board. For unexplained reasons, the attack is being treated as an isolated incident and the terrorism link is being all but ignored by journalists. The term "pirates" is routinely used with only a few reporters calling the attackers "terrorists."

The ship came under attack during the early morning hours when the heavily armed terrorists in two speedboats began firing upon the ship with grenade launchers and machine guns. They assailents were repelled by the ships crew who implemented their security measures which included setting off electronic simulators which created the illusion the ship was firing back at the terrorists.

According to passenger accounts of the attack, there were at least three rocket-propelled grenades or RPGs that hit the ship, one hit a passenger stateroom without inflicting injuries.

When a Somali Federal Government was established in 2004, it remained a government in exile since the capital of Mogadishu remains under the control of a coalition radical Islamists who’ve instituted Sharia law and a justice system known as the Islamic Courts Union.

In the winter of 2006, Al-Shabaab initiated a large-scale insurgency using the same tactics as al-Qaeda, Hamas and Hezbollah, complete with assassinations of government and military officials and suicide bombings targeting aid workers and transitional government officials.

In their report, UN officials blame the government for its failure to control Somalia and point to a lack of professional commanders, and a military that resembles an amateur militia rather than a professional Army.

The UN report points out that The Somali National Security Force was meant to have 8,000 soldiers fully trained and deployed. However, as of the beginning of the New Year, there are fewer than than 3,000 fully trained and equiped soldiers.

"One of the reasons the Islamic Courts Union and Al-Shabaab have both been somewhat popular is because people were sick of clan-based politics," according to the UN report.

Western governments fear that Somalia’s instability may provide a safe haven for international terrorist groups. Al-Shabaab members have cited links with Al Qa’ida although the affiliation is believed to be minimal. The group has several thousand fighters divided into regional units which are thought to operate somewhat independently of one another.

The US has launched selected air attacks against Al-Shabaab leaders thought to have ties to Al Qa’ida, but analysts say this has only increased their support among Somalis.

The Western-backed Ethiopian military invaded Somalia in 2007, but many analysts believe this too augmented Al-Shabaab’s military campaign against the transitional government. The Ethiopians withdrew in January of last year after over 16 months of Al-Shabaab attacks on its forces.

The transitional government is preparing a major military offensive to retake the capital Mogadishu from Al-Shabaab and various other militant groups in the coming weeks.

Report from the Christian Telegraph