The Private Practice Summer 2013/14 Page 15

The Private Practice

Summer 2013/14

ECONOMICS & MARKETS

DOMESTIC NEWS

Once again, the RBA opted not to cut
the cash rate further from its current
record low of 2.5%. The labour-
market news for October continued
to be mixed, with employment
almost static and the unemployment
rate rising to 5.7%, thus continuing
its upward trend.

The exchange rate had a weak

month, falling from 94.7 cents to 91.1
cents. The Reserve Bank Governor
continued to do its best to talk the
$A down, rightly convinced that the
Australian economy would fare better
with a lower currency.

Trying to get the $A down by

jawboning alone puts the Reserve Bank
in the position well summarised by Lady
Macbeth in reference to her husband,
whom she described as behaving "like
the poor cat in the adage". The adage
was, apparently, "the cat would eat fish
but would not get its feet wet". You want
something but you are not prepared to
act to make it happen.

There have, of course, been

rumours that the RBA is prepared to
get its feet wet (that is, to intervene
buying foreign exchange and selling
the Australian dollar); indeed it may
already have done so.

We never find out about these

things until after they have happened.
In any case, it's probably best to assume
that the currency will fall further.

The capital spending data provided

little new information, merely
confirming that we are at or near the
peak of the mining capex boom.

Another rate cut remains unlikely

unless the exchange rate and/or
the unemployment rate head
significantly higher.

WE'RE ALL
GETTING OLDER

It is well known that not only is
each one of us getting older, but the
Australian population is also ageing.
The Productivity Commission recently
released an excellent study that deals
with this issue, entitled An Ageing
Australia: Preparing for the Future,
November 2013.

Perhaps the most important finding

is that, on an `unchanged policy' basis,
government spending on healthcare,
aged care and the aged pension will
increase by about 7% of GDP, to 17%,
between now and 2060.

At the same time, GDP growth

will be slowing, primarily because the
ageing of the population will reduce
the rate of growth of the workforce.
So, demographically sensitive spending
increases as a share of a pie that's not
growing as fast as it used to do. Clearly
the effects will be major.

In the past, of course, demographics

have worked in our favour. For most
of the post-war period, part of the

increase in real incomes per capita has
been a result of sending an increasing
share of the population out to work
(mainly through increased female
participation). From now on, the share
of the population going to work will be
on a declining trend.

In recent years also, real incomes

in Australia have been boosted by the
`kindness of strangers'. The commodity
price boom has meant that Australia's
export prices have outpaced our import
prices. This has been a major factor
driving income growth, as outlined in
the recent (excellent) speech by Philip
Lowe, a deputy governor of the Reserve
Bank. The boom is, of course, over.
Our terms of trade are in decline.

The third way to raise real incomes

is by plain old-fashioned increased
productivity. With the first two means
of providing income growth moving
into reverse, there will be far greater
emphasis on productivity growth in the
years ahead.

But what about the ageing? Is it

really that big a deal?

First, let it be noted that we are

not the only country ageing; indeed
it's difficult to find one that isn't. It's
also worthwhile pointing out that
the median age of the Australian
population in 2050 will still be
significantly less than the current
median age in, for example, Japan
and Italy.