Economics commentator, Michael Pascoe, talks about Australia’s economy

By Robert Half on 16 June 2021

The last 12 to 15 months have been a rollercoaster ride for nearly all businesses in Australia, but here we are in mid-2021 and optimism is back on the agenda once again – about time, perhaps.

Right now, the job market is incredibly buoyant, the economy is surpassing expectations, and demand is high for top quality staff across many different industries. At the same time, many professionals are still embracing and benefitting from new ways of working that the pandemic will, inevitably, leave behind for the long-term. Robert Half research shows two-thirds (67%) of companies have now established flexi-time policies allowing staff to structure their work week as they wish.

Now might be a time for business leaders and job seekers to relish in the moment as they de-shackle their mindset from the unpredictability and doom and gloom of 2020, but organisations are still going to have to cut through some headwinds if they are to survive and thrive – even in Australia. A lack of international talent is currently creating critical skills shortages while 82% of businesses are concerned about losing their top talent in the next year. Surprisingly, only one-third (32%) are planning to increase salaries for staff in this environment.

To help us make sense of what’s to come and how businesses should adapt, Robert Half hosted a breakfast event on the 9th of June at the Four Seasons Hotel in Sydney where the well-known Australian economics commentator, Michael Pascoe, spoke to business leaders about the state of Australia’s economic climate, the future risks, and opportunities.

Strong fiscal policy is what Australia needs right now

Pascoe opened the event by explaining that while there has been heavy reliance on Reserve Bank stimulus in recent years, Australia’s future economic prosperity lies firmly in the hands of strong fiscal policy.

But will it come that easily? As Pascoe put it commenting on this year’s budget announcement, “it is my contention that we are on a rollercoaster ride to the next election”.

With a nation in need of firm leadership through a crisis, the politics of 2020 led to a political ‘high’ for the government, according to Pascoe – no doubt underpinned by bold moves such as JobKeeper and international border closures, which have proved to be both popular and successful measures. This year however, Pascoe pointed out to guests that things are rapidly changing again.

Pascoe emphasised that a few major issues have come to the fore in 2021 which have served to erode the political gains made last year, such as the treatment of women in politics. “Issues around the vaccination rollout and quarantine failings have also come home to roost – and this is still continuing,” he continued. In this context, Pascoe said it’s probably not surprising that the compelling story of economic recovery took centre stage in this year’s budget announcement, but he questioned whether things are as they seem, or at least looking through a long-term lens.

Acknowledging that the budget will offer an economic boost in the short-term, Pascoe posed the question: “Does it cure the underlying problems in the Australian economy?”

What will it take to sustain economic growth?

To ensure ongoing economic growth in Australia – to truly realise the ‘boom’ everyone is expecting and not return to the lacklustre conditions of 2019 – what needs to be done?

Pascoe highlighted that one of the biggest issues facing Australia is that “in real terms, wage growth is negative in the new financial year”. Meanwhile, he said economic strength in 2021/22 is expected to be coming from household consumption. According to Pascoe, there is a high risk that the household spending which is propping up Australia’s good fortune will start to slow down if workers don’t receive pay rises soon.

Another longer-term question for Australia now is “what happens to population growth?”, Pascoe stressed to the audience. He said, “an argument being played out almost every day, it seems, in the papers is the current shortage of staff businesses are experiencing”. Pascoe made the argument that questions around immigration and how we go about training and growing our own domestic workforce to mitigate skills shortages are all to be answered.

While there are some ‘loose ends’ that are likely to weigh on economic performance in the coming years, Pascoe highlights we are fortunate that the states are increasing their spend on infrastructure with NSW in particular working at full throttle. He says that, despite all its advertising, the Federal Government is not proposing to increase its transport infrastructure investment in real terms.

The confidence to invest and employ

According to Pascoe, to get to what really matters in the future economy, “[businesses] must have confidence to invest and employ beyond what promises to be a great financial year”. He later told the audience that we are currently engaging in a real-time experiment of the impact of immigration policies, particularly with ongoing border closures, on investment in wages. “[To date], Australia has been built on and thrives on migration”, Pascoe told the audience.

“Without immigration, will [companies] start paying people more to get the skills they need?”, asked Pascoe, while also acknowledging the Robert Half survey which says that currently, only 32% of companies are planning to give all their staff a pay rise this year while 38% indicate only top performers will get an increase. Pascoe said the Robert Half survey results were representative of the capital strike on wages that Australia has seen for the past decade – “a mindset”.

The importance of wage rises

“The inability to understand the importance of wage rises, or that there are other ways to grow profits other than cutting costs is the most important part of our domestic challenge, economically”, said Pascoe, while he also drew parallels to the well-known saying: ‘doing the same thing over and over and expecting a different result is the definition of insanity’. Speaking about the tax implications, Pascoe argued that “if you only give staff the CPI as a wage increase, you are reducing their living standards and their spending power because, in real terms, they are going backwards” – since the lift is pre-tax, so post-tax it would be less than CPI.

“If we don’t get real wage growth – real increases in spending power – then the consumer surge is not sustainable,” he continued.

Adding more to the story of how businesses should adapt and change to support Australia’s future economy, Pascoe points out that businesses are not investing in the way they used to. He told the audience that for the last decade, non-mining investment has only averaged around 9%, whereas in previous decades it was around 12%. “And we don’t get the productivity gains we need without more capital investment”, he concluded.

Having charismatically outlined several underlying vulnerabilities in Australia’s economic fabric which need to be addressed by both businesses and government, Pascoe encouraged business leaders to scratch below the shiny surface and dig deeper to bring real, sustainable change and prosperity.

To wrap up the event, Pascoe asserted the importance of people power to Australia’s economic engine. “In terms of the future – how we sustain ourselves forever – it is my contention that in the end, the best thing a government can do is educate the population. It’s about people – the quality and talents of people, supported by investment in education”.

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