Topic: Australian Economy

Australian Economy
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Labour Market Persistence from Recessions

Iris Day and Keaton Jenner

The COVID-19 pandemic has led to a rapid deterioration in labour market outcomes, some of which may be long-lasting. This article examines the long-lived effects of previous downturns on unemployment in Australia, including by assessing how regional labour market outcomes varied during and after the GFC and early 1990s recession. We find that recessions have enduring effects on unemployment rates: regions that experienced larger-than-average downturns had significantly higher unemployment rates for around a decade afterwards.

labour market, pandemic
Australian Economy
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The Rental Market and COVID-19

Richard Evans, Tom Rosewall and Aaron Wong

The COVID-19 pandemic is an unprecedented shock to the rental housing market, reducing demand for rental properties at the same time as supply has increased. Households most affected by the economic impact are more likely to be renters, and border closures have reduced international arrivals. The number of vacant rental properties has increased as new dwellings have been completed and some landlords have offered short-term rentals on the long-term market, particularly in inner Sydney and Melbourne. Government policies have supported renters and landlords. Rents have declined, partly because of discounts on existing rental agreements and it is likely that rent growth in many areas will remain subdued over coming years.

housing, pandemic
Australian Economy
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The Economic Effects of Low Interest Rates and Unconventional Monetary Policy

Rochelle Guttmann, Dana Lawson and Peter Rickards

The cash rate is currently at its effective lower bound and the Reserve Bank has put in place a suite of alternative monetary policy tools. This article uses the Bank’s macroeconometric model of the Australian economy, MARTIN, to analyse the implications of a constrained cash rate and illustrate how unconventional monetary policies can support the Australian economy. By lowering interest rates that are typically affected indirectly through changes in the cash rate, unconventional policies can stimulate economic activity through many of the same channels as conventional monetary policy.

cash rate, pandemic, martin, modelling, monetary policy
Australian Economy The hand of a woman inserts a coin into a piggy bank.
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Household Wealth prior to COVID-19: Evidence from the 2018 HILDA Survey

Nicole Adams, Cara Holland, Gabrielle Penrose and Lorenzo Schofer

This article examines the distribution of wealth in Australia prior to the COVID-19 pandemic and considers the implications for the financial resilience of households during the associated economic downturn. In terms of their wealth, most Australian households appear well placed to withstand a temporary fall in income. However, younger households and those working in industries most affected by activity restrictions are likely to be more vulnerable to income loss; only around half of these households could cover three months of expenses out of their liquid assets. Highly indebted households that experience shocks to their income and have limited liquid assets will also find this period particularly challenging. Policies to support household income, as well as those aimed at rescheduling debt repayments, should cushion these effects. The resilience of households will also depend on the timing and sustainability of the economic recovery.

wealth, data analytics, households, debt, pandemic
Australian Economy A collection of old and new mobile phones.
Photo: Peter Dazeley – Getty Images

Quality Change and Inflation Measurement

Stephanie Parsons

Households’ perceptions of inflation can differ from inflation as measured by the Consumer Price Index (CPI). One factor that may contribute to this difference is that the CPI seeks to take into account changes in the quality of many items that households buy. Around 2–3 per cent of the CPI basket is adjusted for quality change each quarter, with the prices of consumer durables most affected. While a range of methods have been developed to help statisticians identify and quantify quality change, it remains a challenging area of price measurement.

inflation, consumption, prices, data analytics
Australian Economy An older male employee sits at a table talking to his younger colleagues.
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Why Study (or Not Study) Economics? A Survey of High School Students

Tanya Livermore and Mike Major

There has been a stark decline in the size and diversity of the Year 12 Economics student population since the early 1990s. The Reserve Bank has commissioned a comprehensive survey of students to gain quantitative evidence of the factors contributing to this decline. The survey responses highlight that while economics in general is perceived to be important for society, many students lack an interest in, or understanding of, Economics as a subject. This finding is even more pronounced for students who are female, those from a lower socio-economic background and those from regional schools.

educators and students, rba survey
Australian Economy A collage of newspaper headline clippings related to economic topics.
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News Sentiment and the Economy

Kim Nguyen and Gianni La Cava

The large and immediate effect of the COVID-19 pandemic on economic activity has increased the need for more real-time indicators of the economy. This article discusses a new indicator of `news sentiment’, which uses a combination of text analysis, machine learning and newspaper articles. The news sentiment index complements other timely economic indicators and has the advantage of potentially being updated on a daily basis. The news sentiment index captures key macroeconomic events, such as economic downturns, and typically moves ahead of survey-based measures of sentiment. Related indicators, such as the news uncertainty index, similarly help to better understand real-time developments in the Australian economy.

technology, data analytics
Australian Economy The sun rises behind windmills and solar panels.
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Renewable Energy Investment in Australia

Timoth de Atholia, Gordon Flannigan and Sharon Lai

Renewable energy investment has increased significantly in Australia over recent years, contributing to a continuing shift in the energy generation mix away from traditional fossil fuel sources. Current estimates suggest that investment in renewable energy has moderated from its recent peak and is likely to decline further over the next year or two. In the longer term, the transition towards renewable energy is expected to continue. Significant coal-fired generation capacity will be retired over coming decades and is likely to be replaced mainly by distributed energy resources and large-scale renewable energy generators, supported by energy storage.

investment, non-mining
Australian Economy The detail of a map showing the Australian continent.
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Regional Variation in Economic Conditions 

Fiona Price

Differences in economic conditions between capital cities and regional areas have widened since the early 2000s. Some regional areas, particularly outer regional and remote areas, have faced considerable structural changes and have taken longer than other regions to adapt to these developments. Most regional labour markets appear to have adjusted quite well to the differences in regional economic conditions, though the adjustment process may have been more difficult for some regions.

monetary policy, labour market, mining, technology, capital
Australian Economy Family members spanning three generations gather outside.
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Demographic Trends, Household Finances and Spending

Tomas Cokis and Kate McLoughlin

The share of the population in their peak earning and spending years (ages 35–54) has decreased over the past decade, while the share aged 65 and above has increased. Demographic change has tended to reduce aggregate growth in household income and consumption, but by less than what previous patterns of household spending would suggest. This is because older households have earned and consumed more than in the past, and they have become wealthier. By contrast, growth in spending by younger households has been subdued, consistent with their weak income growth. The different earning and spending behaviour of households across different age groups will continue to affect trends in aggregate household consumption and income as the population ages further.

consumption, wealth, finance, debt
Australian Economy The spines of some old books on a shelf.
Photo: Reserve Bank of Australia

Being Unreserved: About the Reserve Bank Archives

Virginia MacDonald and Jacqui Dwyer

The Reserve Bank of Australia has a unique and rich archives. In addition to records about the nation’s central bank, the archives contain records about Australia’s economic, financial and social history over almost two centuries. The extent of the collection reflects the Bank’s lineage, with its predecessor (the original Commonwealth Bank of Australia) having absorbed banks with a colonial history. Consequently, the Bank’s archival collection spans convict banking records through to information about contemporary episodes in Australia’s history. This article explains why the archives exist, how they are managed and plans to make them more accessible to the public.

Australian Economy The outlines of two miners and an excavator against a sun setting.
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Education Choices and Labour Supply During the Mining Boom

James Bishop

The mining boom led to large increases in wages for many lower-skilled jobs in mining regions. This raised the opportunity cost of remaining in school, TAFE or university for many students, particularly those in mining areas. I show that this led fewer people in those areas to pursue tertiary study. These educational responses were an important source of labour market adjustment during the boom. It accommodated most of the strong rise in the labour force participation rate of 15–24 year olds in the resource-rich states, and 5–10 per cent of the total additional labour supply needed in those states.

mining, educators and students, labour market, resources sector
Australian Economy Two IT experts look at a set of monitors displaying data
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The Framework for Monetary Policy Implementation in Australia

Domestic Markets Department

The Reserve Bank of Australia's domestic market operations are designed to ensure that the cash rate is consistent with the target set by the Reserve Bank Board. The most important tools to guide the cash rate to the target are the interest rate corridor and daily transactions to manage liquidity in the interbank overnight cash market. The RBA also ensures that there is sufficient liquidity in the cash market for it to function smoothly. This article provides an overview of the RBA's operational framework for implementing monetary policy.

monetary policy, cash rate, market operations
Australian Economy Workers during peak hour are crowding a pedestrian zone
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Wages Growth by Pay-setting Method

James Bishop and Natasha Cassidy

Using job-level micro data, we show that the dynamics of wages growth differ across pay-setting methods. In recent years, wages growth has been strongest for award-reliant workers, stable at low levels for those on enterprise bargaining agreements (EBAs), and low but rising for those on individual arrangements. These trends reflect differences in the arrangements governing each pay-setting method, and differences in the types of workers covered by them. For instance, individual agreements react most flexibly to changes in labour market spare capacity, while government policies have kept public sector wages growth in EBAs relatively unchanged of late. This new disaggregation of wages growth allows for an estimation of the pass-through of award wage increases to other wage outcomes in the economy. We also find that the new breakdown provides a useful framework for forecasting aggregate wages growth.

wages, payments, employment
Australian Economy The hands of a cashier retrieve banknotes from a till
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Competition and Profit Margins in the Retail Trade Sector

Matthew Carter

Net profit margins have declined for both food and non-food retailers over recent years. This has been driven by a decline in gross margins suggesting a reduction in firms' pricing power. This is consistent with information from the Reserve Bank's business liaison program about heightened competition in the retail trade sector. Liaison indicates that firms are seeking to offset the decline in margins through measures such as vertically integrating supply chains and adjusting product mixes. Retailers also report a push to reduce operating expenses such as rent and labour, though with mixed success.

retail, business, trade
Australian Economy Two construction cranes dominate the sky next to a mobile tower
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Can Structural Change Account for the Low Level of Non-mining Investment?

Jonathan Hambur and Keaton Jenner

No, it cannot. Non-mining firms have invested less over the past decade, relative to their output, than they did over the previous two decades, and this decline in investment intensity has been broad based across firms. This reduced investment could contribute to slower economic growth, if, for example, it is associated with decreased adoption of new technologies. This article looks into potential driving forces behind the decline in the rate of investment, finding that it cannot be explained by shifts in industry structure, or the composition of firms by age or date of formation. The size of the decline is consistent with what would be expected given slower technological progress and lower depreciation rates. But there might be other, more cyclical reasons for the observed slowdown in non-mining investment.

business services, investment, non-mining
Australian Economy Three employees work on large charts stuck to a transparent wall
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Explaining Low Inflation Using Models

Natasha Cassidy, Ewan Rankin, Mike Read and Claudia Seibold

The Reserve Bank's inflation forecast models can help assess which factors have contributed most to low inflation over recent years. The models find that spare capacity in the economy and the associated low wages growth can account for much of recent low inflation outcomes. This article outlines the inflation forecast models used at the Bank, and looks at the recent performance of the Bank's inflation forecasts.

modelling, inflation, labour market, wages, forecasting
Australian Economy A long mining train snakes its way through dry country
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Exploring the Supply and Demand Drivers of Commodity Prices

Michelle Cunningham and Emma Smith

Quantifying the relative importance of supply and demand in price movements of commodities can help inform how changes in these prices might impact the Australian economy, via exports, business investment and the exchange rate. Isolating the extent to which a change in commodity prices is driven by demand also provides a timely indicator of global economic activity. In this article, we use a dynamic factor model to help interpret changes in commodity prices as being driven by supply and/or demand developments. Results from the model are consistent with prior understanding of several notable episodes of commodity prices movements.

commodities, prices, modelling
Australian Economy Two workers inspect a construction site, with a graph superimposed on the image.
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Firm-level Insights into Skills Shortages and Wages Growth

Hannah Leal

Despite increased reports of skills shortages from contacts in the RBA's regional and industry liaison program since 2016, national wages growth has picked up only a little and remains subdued. Information collected through the liaison program since the early 2000s suggests Australian firms use a range of practices in addition to, and sometimes before, increasing wages to address skills shortages. In the short run, this may constrain the effect of skills shortages on wages growth.

employment, labour market, skills, wages
Australian Economy A calculator, model of a house and keys are lying on a spreadsheet.
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Wealth and Consumption

Diego May, Gabriela Nodari and Daniel Rees

Do households consume more when their wealth increases? Our research identifies a positive and stable relationship between household wealth and consumption, largely reflecting changes in spending on motor vehicles, durable goods and other discretionary spending. Increases in household wealth supported household spending between 2013 and 2017, when growth in disposable income was weak. Similarly, declines in household wealth typically weigh on consumption. However, a decline in household wealth is less likely to coincide with weaker consumption growth if it occurs at a time when the labour market is strong and household income growth is firm.

wealth, housing, consumption
Australian Economy Pedestrians crossing a street are superimposed over a crane, skyscrapers and free-standing houses.
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The Labour and Capital Shares of Income in Australia

Gianni La Cava

In Australia, the share of total income paid to workers in wages and salaries (the ‘labour share’) rose over the 1960s and 1970s but has gradually declined since then. The corollary is that the share of income going to capital owners in profits (the ‘capital share’) has risen. The long-run increase in the capital share largely reflects higher returns accruing to owners of housing (primarily rents imputed to home owners, particularly before the 1990s) and financial institutions (since financial deregulation in the 1980s). Estimates of the capital share of the financial sector are affected by measurement issues, though structural factors, such as a high rate of investment in information technology, have reduced employment and increased capital in the sector.

labour market, capital, wages, housing, profits, finance
Australian Economy
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Business Concentration and Mark-ups in the Retail Trade Sector

Jonathan Hambur and Gianni La Cava

The share of industry sales accounted for by the largest Australian businesses (or ‘business concentration’) has gradually risen since the start of this century. This increase in concentration has been mainly driven by the retail trade sector, particularly in recent years. In contrast, estimates of the ratio of retail prices to marginal cost (or ‘mark-ups’) rose over the 2000s but have declined in recent years. Taken together, the evidence suggests that the retail trade sector has become more competitive in recent times, following a period of declining competition through the 2000s.

retail
Australian Economy
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Which Firms Get Credit? Evidence from Firm-level Data

Gabriela Araujo and Jonathan Hambur

To improve our understanding of how lenders assess firms' creditworthiness, this article relates the characteristics of firms to whether their applications for credit were approved. We find evidence to suggest that firms with relatively low profitability, high debt servicing burdens or limited credit histories were less likely to have their applications approved than other comparable firms. However, the decision to approve an application for credit also appears to be influenced by a range of other unmeasured factors, which possibly reflects the complexity of the approval process in practice.

debt, data analytics
Australian Economy
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The Effect of Minimum Wage Increases on Wages, Hours Worked and Job Loss

James Bishop

Australia has a detailed system of ‘awards’ that specify different minimum wages depending on the industry, location and skill of an employee. I find that legislated adjustments to award wages in Australia between 1998 and 2008 were almost fully passed on to wages in award-reliant jobs. There is no evidence that modest, incremental increases in award wages had an adverse effect on hours worked or the job destruction rate.

wages, employment
Australian Economy
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Access to Small Business Finance

Ellis Connolly and Joel Bank

The Reserve Bank has conducted additional outreach this year to hear a broad range of perspectives on small business finance. Many small businesses looking to grow still find it challenging to access finance, particularly without providing real estate as security. Lenders highlight that they are keen to lend to small businesses, but that unsecured finance involves more risk. This article considers these issues and outlines some initiatives market participants have suggested that could help to improve access to finance for small businesses.

business, credit, start-ups
Australian Economy
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Does It Pay to Study Economics?

James Bishop and Rochelle Guttmann

Economics graduates work in a broad range of occupations and industries, often beyond the discipline of economics itself. The earnings of economics graduates are higher than in most other fields of study, including business studies. By estimating wage premiums for various skills, we assert that the comparatively strong earnings of economics graduates comes from the development of analytical thinking and quantitative skills which are highly rewarded in the labour market.

wages, educators and students
Australian Economy
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Firm-level Insights into IT Use

Sharon Lai, Emily Poole and Tom Rosewall

Firms in Australia have used advances in information and communication technology (IT) to become more productive, reduce costs, and improve their understanding of customers. The rate at which new technology has been adopted by firms differs greatly, as do the benefits from using IT. The way firms are using IT can help to explain trends in the broader economy. Firms' expenditure on computer software has grown faster than other forms of investment. The adoption of new technology is also changing the composition of jobs in the economy.

technology, business, employment, automation
Australian Economy
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The Cyclical Behaviour of Labour Force Participation

Richard Evans, Angus Moore and Daniel Rees

When economic conditions improve, more people enter the labour force. Understanding the nature of this cyclical relationship between participation and economic activity is important for determining the amount of slack in the labour market and predicting how the economy will respond to changes in economic conditions. The participation rates of young people, 25–54-year-old females and older males are the most responsive to changes in economic conditions. If the participation rate did not adjust, expansions would be more inflationary, while recessions would be more disinflationary and lead to larger increases in involuntary unemployment.

wages, employment, inflation
Australian Economy Image showing transmission of data.
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Banking Fees in Australia

Emily Perry and Christian Maruthiah

The Reserve Bank has conducted a survey on bank fees each year since 1997. The most recent survey suggests that banks' fee income from both households and businesses rose in 2017, due to a combination of growth in the volume of services for which fees are charged and higher unit fees on some products. Deposit fee income continued to decline relative to the value of outstanding deposits, while lending fee income as a share of assets was steady. Greater use of electronic payment methods continued to support strong growth in merchant service fee income

banking, technology, rba survey
Australian Economy University graduates, mortar board hats
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Labour Market Outcomes for Younger People

Zoya Dhillon and Natasha Cassidy

Monitoring developments in the labour market for younger people is important, because they make up a large share of unemployment in the economy, and because early-career labour market outcomes can affect future outcomes. This article outlines the demand and supply factors that have affected 15–24 year old workers in Australia. In particular, we analyse the factors affecting their participation in the labour force, such as increased education attainment. We also show how younger workers are more adversely affected than the rest of the population when economic conditions slow. Over the past decade, increases in the unemployment and underemployment rates for younger people have been over twice as large as for the overall labour market. The share of 20–24 year olds that have become disengaged from either study or work has also increased.

Employment, Wages
Australian Economy Crane over construction workers at sunny construction site
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Private Non-mining Investment in Australia

Michelle van der Merwe, Lynne Cockerell, Mark Chambers and Jarkko Jääskelä

While mining investment has risen in importance over recent decades, the non-mining investment share of output has fallen. This article explores some of the factors that have contributed to the downward trend in the non-mining investment share over time. The article finds that the future non-mining investment share could be around 1–2 percentage points lower on average than it was in the two decades before the financial crisis.

Investment, Capex, Manufacturing, Household Services, Business Services, Technology
Australian Economy Heavy mining equipment sits among large piles of red earth
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Mining Investment Beyond the Boom

Keaton Jenner, Aaron Walker, Cathie Close and Trent Saunders

The construction phase of Australia's mining boom is now almost complete. In this article, we use two complementary approaches to investigate what mining investment might look like look over the next decade or so. The first approach explores the long-run determinants of mining investment and its likely long-run share of GDP. We then take a bottom-up approach, focusing on the amount of investment that will be required to maintain firms' existing productive capacity; in this approach we focus on Australia's three major commodities (coal, iron ore and liquefied natural gas). The analysis suggests that mining investment will likely make up a larger share of GDP than it did before the boom, and that it will continue to play an important role in driving movements in Australia's economic activity.

mining, resources sector, investment, capex
Australian Economy A blue ribbon connects a bright light bulb to an array of cogs
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Structural Change in the Australian Economy

Rachel Adeney

The structure of the Australian economy has changed significantly over the past 50 years. Services have become an increasingly important part of the economy. Supply chains have lengthened as traditional goods-producing industries have become more specialised in their core activities and outsourced their non-core activities to the business services sector. These developments have had significant implications for the composition of employment and the skill requirements of the Australian labour force.

services sector, employment
Australian Economy A woman explains the content of a computer screen to a male colleague
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Perceptions of Job Security in Australia

James Foster and Rochelle Guttmann

A concern that low job security is constraining wage growth has been expressed in many countries. Using data on Australian households over time, this article finds that workers' perceptions of their own job security have declined in recent years. This deterioration has occurred across many job and personal characteristics. These weaker job security perceptions have provided a small drag on wage growth.

employment, wages, automation
Australian Economy A highrise building stands out among lower suburb buildings.
Photo: Simon Bradfield – Getty Images

The Distribution of Mortgage Rates

Michelle Bergmann and Michael Tran

Mortgage interest rates can vary considerably across borrowers and are typically less than the standard variable rates (SVRs) advertised by banks. This article uses loan-level data to explore the relationships between interest rates and the characteristics of borrowers and their loans. Mortgages with riskier characteristics tend to have higher interest rates. Discounts applied to SVRs have tended to increase over recent years, and are also influenced by the type of loan and its size.

mortgages, interest rates, securitisation
Australian Economy A photograph of a Martin Place street sign in front of the Reserve Bank Head Office
Photo: Reserve Bank of Australia

Meet MARTIN, the RBA's New Macroeconomic Model

Tom Cusbert and Elizabeth Kendall

The Reserve Bank has begun using a new full-system macroeconomic model called MARTIN in policy analysis and forecasting. It is designed to be used as part of the Bank's existing processes for forecasting and analysis that use a range of information, models and staff assessments. MARTIN is already being used in these processes to help understand economic developments and quantify risks, and in time it will be used to extend forecasts beyond the usual two-to-three-year horizon.

martin, modelling, forecasting

The graphs in the Bulletin were generated using Mathematica.

ISSN 1837-7211 (Online)