Labour market policy failure will hurt the weakest parts of the economy

Source: The Australian

The China-centred Asian boom continues to generate inflationary labour shortages amid our record wave of mining development. But the European fears that hit global sharemarkets this week are now adding to the jobs fallout, particularly in manufacturing, as the economy restructures around its mining boom.

Overall job growth has slowed to a crawl, lifting unemployment from 4.9 per cent to 5.3 per cent since autumn. Manufacturing shed 30,000 jobs between April and August, according to the Australian Bureau of Statistics. In a sign of rising job insecurity, this week's Westpac-Melbourne Institute index of unemployment expectations shot up 8.5 per cent in September.

Unemployment hasn't risen further because lower immigration has put a brake on the working-age population, in turn dampening retail spending. The working-age population grew only 5400 last month, according to the ABS. Annual labour supply growth has dropped below 0.9 per cent, down from more than 2 per cent last year.

The key point is that the jobless rate is not falling below 5 per cent, as forecast by Wayne Swan's budget in May, let alone to just above 4 per cent as the Reserve Bank then tipped for 2013.

Yet the Reserve Bank is not cutting its 4.75 per cent cash rate because it is more focused on putting a lid on a "significant pick-up in labour costs growth", generated in part by the economy's weak productivity performance.

The ABS this week modestly lowered the inflation heat with a new seasonal adjustment for the consumer price index. But it is not enough to change the basic picture that underlying inflation has bottomed and is headed up.

By not reacting to the weaker-than-forecast job market, the central bank is putting the pressure on businesses, particularly in manufacturing exposed to the high dollar, to squeeze out productivity gains, to let go of workers "hoarded" during the financial crisis and to stand up to union wage demands encouraged by Julia Gillard's industrial relations regime.

The message is that the mining boom's high dollar is here to stay. And the economy is being weighed down by natural disasters such as the Queensland floods and the new outbreak of global financial turmoil since July.

Two disputes stand out, even if they don't resonate in the media as they used to. Amid the manufacturing "crisis", 3000 Toyota workers walked off the job again this week over the loss-making company's 3 per cent-plus wage offer. Qantas baggage handlers and refuellers have announced strike action next week over a 5 per cent pay claim, even though the airline needs to reduce its cost structure to remain competitive.

The unions have yet to concede the productivity slump means entrenched expectations of 4 per cent wage growth are now too high for the central bank's 2 per cent to 3 per cent inflation target, at least outside the mining boom. Wage expectations have to be deflated, productivity has to suddenly recover or unemployment has to rise.

The renewed euro crisis is feeding into this equation by hitting business confidence and sharemarket wealth. That's shoring up the jump in household savings as Australians seek to pay down their debts and curb their shopping.

The euro crisis could explode at any time as European politicians fail to convince investors they have a credible plan to bail out debt-burdened Greece and Portugal, and even Spain and Italy. The basic problem is the southern Mediterraneans cannot match the German productivity and work discipline. Yet Europe's single currency and interest rate policy is not backed by a system of budget transfers to lagging countries. German taxpayers are loath to foot the bill for countries that pay for their public servants to retire before 60.

The fault lines this week extended dangerously into the core of Europe's common currency zone. Moody's downgraded the credit rating of French banks Societe Generale and Credit Agricole. And a German member of the European Central Bank quit in apparent protest over its buying of Spanish and Italian bonds to cap government borrowing costs. It's arguably a form of printing money akin to the US Federal Reserve's "quantitative easing".

"The global economy has entered a new danger zone with little running room as European countries resist difficult truths about the common responsibilities of a common currency," World Bank president Robert Zoellick warned in Washington this week.

And International Monetary Fund head Christine Lagarde warned that government, bank and household debt burdens in Europe and the US were creating a vicious cycle of weakening business investment and job creation.

A Greek default would hit the poorly capitalised balance sheets of French and other European banks, requiring government bailouts. The financial contagion and heightened uncertainty over the euro's future could throw Europe back into recession, send shock waves through global financial markets and undermine growth in China and our other big Asian markets.

All this means Swan will head into a squall of pessimism when he leaves for Washington on Thursday to attend a G20 finance ministers meeting and then the autumn meetings of the IMF and World Bank.

While a European financial eruption could force the Reserve Bank to cut interest rates, it is too early to assess the growth hit to China from the past few months of financial turbulence. Unlike 2008, global credit markets remain functional and commodity prices high, including for iron ore and coal.

Parts of the Chinese economy may be slowing but growth overall appears to remain robust. That's the key to Australia's prospects. The federal government's new Bureau of Resources and Energy Economics this week reported mining and energy commodity export revenue jumped 27 per cent in 2010-11 to a record $175 billion. Exports of liquefied natural gas hit $10bn for the first time.

Resources Minister Martin Ferguson suggested a further $50bn to $60bn would be poured into the nation's $430bn pipeline of mining and energy projects in the next six to eight months. "By Easter next year we will have $500bn committed to new investment in Australia," he said.

The Asian demand driving this Australian investment boom means inflation continues to be the main concern for Chinese authorities. And it's not just China. India's annual consumer inflation rate this week accelerated to a 13-month high of 9.8 per cent. That prompted its central bank to lift its policy interest rate to 8.25 per cent yesterday, the 12th rate hike since March last year. Inflation is moving north even in depressed North Atlantic economies. In the US, food and energy prices this week showed up in a higher 3.8 per cent headline inflation rate, even amid 9 per cent unemployment. Similarly, British inflation rose to 4.5 per cent, fuelled by higher power bills and clothing prices.

It smacks of a massive global policy failure extending from Europe's currency crisis to America's largest budget deficits in peacetime history, to China's under-valued exchange rate. Lagarde warns the vicious cycle of weak developed economy growth is being "exacerbated by policy indecision and political dysfunction".

Rather than fully deal with their budget crises, the North Atlantic economies are desperately trying to pump up growth through near-zero interest rates and printing money. That is feeding into China's strong demand for energy and foodstuffs, in turn fuelling global commodity price inflation.

This leaves Australia and Reserve Bank governor Glenn Stevens caught between what Standard & Poor's this week called "an unusual confluence of opposing forces". Having held policy a touch on the tight side since late last year, he is positioned to move interest rates up or down next year depending on how the European and Chinese stories play out.

Gillard yesterday claimed her Fair Work regime's collective philosophy was "incredibly true to Labor values". But the increase in union bargaining power is fuelling inflation, undermining productivity and holding up interest rates. This Australian policy failure will hit hardest in the weak parts of the "patchwork economy" that Labor is claiming to help, as unemployment edges up amid our biggest mining boom on record.