Topic: Australian Economy

Australian Economy Dr HC Coombs speaking into a microphone at the Unitited Nation's Meeting for Asia and the Far East, seated at a table with a sign for Australia.
Photo: RBA Archives PN-002868

HC Coombs: Governor of Australia's Central Bank 1949–1968

Selwyn Cornish

Dr HC Coombs was Governor of Australia’s central bank for nearly 20 years. His appointment followed significant roles in Australia’s war-time administration and post-war reconstruction, where he was an architect of Australia’s international full employment policy, known as the ‘Positive Approach’. When appointed Governor of the central bank in 1949, Coombs remained committed to the pursuit of full employment. Influenced by Keynes, he sought to maintain aggregate demand and supply in ‘reasonable balance’, something the Reserve Bank continues to do today. After retiring from the Bank in 1968, Coombs continued to promote the arts in Australia and the rights and welfare of First Nations Australians. He became a senior adviser to the Whitlam Government and chaired the Royal Commission on Australian Government Administration – a fitting conclusion for someone often described as the nation’s greatest public servant. This article considers the life and career of HC Coombs, and complements the series of records that have been released on Unreserved.

banking, history, monetary policy
Australian Economy
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Economic Literacy: What Is It and Why Is It Important?

Madeleine McCowage and Jacqui Dwyer

One of the core objectives of the Reserve Bank’s public education program is to improve economic literacy. While the social benefits of economic literacy are well established, defining what is meant by this term is not straightforward and has been the subject of debate over many decades. This article explores the meaning of ‘economic literacy’. To arrive at a working definition, it discusses the economic principles that should be understood for someone to be considered economically literate, along with the topics they should be familiar with and the ways of thinking that we would expect them to display. In doing so, it distinguishes between economic and financial literacy. The article concludes by posing questions for future research on how economic literacy in Australia might be measured and how it might be supported.

education
Australian Economy
Photo: Chris Williams Black Box – Getty Images

The Recovery in the Australian Tourism Industry

Angelina Bruno, Kathryn Davis and Andrew Staib

The Australian tourism industry is gradually recovering from the COVID-19 pandemic that brought global travel to an unprecedented standstill. International tourism fell sharply in early 2020 and has only slowly recovered since restrictions were lifted in the first half of this year. By contrast, domestic tourism spending bounced back quickly as local restrictions eased and is now above pre-pandemic levels. This article outlines the recovery in the Australian tourism industry following the pandemic, the challenges the industry has faced in reopening, and the uncertainties around the outlook for the tourism industry over the next few years.

COVID-19, international, labour market, services sector
Australian Economy
Photo: Reserve Bank of Australia

The Reserve Bank's Liaison Program Turns 21

Jacqui Dwyer, Kate McLoughlin and Aaron Walker

In 2001, the Reserve Bank established its liaison program – a formal program of economic intelligence gathering, through which Bank staff meet frequently with firms, industry bodies, government agencies and community organisations. The program is systematic in its approach to collecting and assessing information, and the intelligence obtained is a useful complement to published sources of data and economic models in informing the Bank's assessment of economic conditions. In addition, the information gathered is available in near real time, making it useful for ‘nowcasting’ and understanding the implications of short-term shocks to the economy. This article looks at the process of liaison, the nature of the information collected and how it has been used over its 21 years of operation.

business, rba survey
Australian Economy
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Sentiment, Uncertainty and Households' Inflation Expectations

Yad Haidari and Gulnara Nolan

High inflation expectations can have significant consequences for the economy as a whole, and can become self-reinforcing. It is therefore noteworthy that inflation expectations of Australian households are persistently higher than actual inflation. This is partly because when consumers are more uncertain about the economy, they tend to report their inflation expectations in round multiples of 5 per cent, which is higher than inflation has averaged over recent decades. In addition, there is a negative relationship between consumer sentiment and inflation expectations. This article examines the relationship between sentiment, uncertainty and households' inflation expectations in Australia, and considers how this uncertainty might be addressed. It suggests that targeted and clear communication about inflation can help to reduce uncertainty and provide consumers with a better understanding of the path of future inflation.

households, inflation, risk and uncertainty
Australian Economy
Photo: skynesher – Getty Images

Job Mobility in Australia during the COVID-19 Pandemic

Susan Black and Emma Chow

The COVID-19 pandemic has led to large disruptions to the Australian labour market. Initially, workers were less likely to change jobs because of the uncertain economic environment, the decrease in advertised jobs and the JobKeeper program that helped workers remain attached to their employers. More recently, job mobility has increased as workers have caught up on planned job changes or been encouraged by the strong labour market to change jobs, particularly in high-skilled roles experiencing strong labour demand. This article reviews developments in job mobility in Australia through the pandemic, and compares these outcomes to other advanced economies. It also examines the potential implications for wages; a high rate of job mobility tends to be associated with higher wages growth in a tight labour market, as employers in sectors with high demand for labour compete for new staff or raise wages to retain staff.

COVID-19, labour market, labour market, wages
Australian Economy Guest article
Photo: Jorge de Araujo

First Nations Businesses: Progress, Challenges and Opportunities

Michelle Evans and Cain Polidano

Australia's First Nations business sector is growing at a pace of around 4 per cent per year, fuelled by growing demand. However, many budding First Nations entrepreneurs still face substantial barriers to establishing a successful business. This article discusses the need to develop trust for effective policy environments that support First Nations businesses, and describes how ongoing challenges of access to financial, social and symbolic capital continue to test First Nations business owners. Despite this, there are opportunities for First Nations businesses in the forms of Indigenous preferential procurement policies, and First Nations-specific business development programs as well as financial products and services. It is not yet clear how effective the policy environment is in addressing access and discrimination challenges, nor how widespread the benefits are to First Nations businesses. As such, the article concludes by discussing the role of data development for accountability.

business, First Nations
Australian Economy
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Exploring the ‘Confidence Gap’

Joyce Tan

Previous Reserve Bank research has shown that female students and students from less advantaged backgrounds are more likely to report having a poor understanding of economics and lower confidence in their economics proficiency than other students. This is consistent with their falling participation in the subject. Using data from a survey administered by the Bank, this article investigates whether these negative perceptions are in line with students' observed proficiency or whether there is a ‘confidence gap’. It finds that females continue to report having poorer understanding and less confidence even after accounting for their observed proficiency, indicating a confidence gap. By contrast, students' self-perceptions by socio-economic status look to be in line with variations in their observed proficiency. These findings have implications for the design of interventions to encourage greater participation by these students and support increased diversity amongst the economics student body.

education
Australian Economy
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Tracking Consumption during the COVID-19 Pandemic

Rosa Bishop, John Boulter and Tom Rosewall

The COVID-19 pandemic was an unprecedented shock to the economy that caused large and unexpected changes in household spending behaviour. Restrictions on household activity limited opportunities to consume services and people switched to purchasing more goods. The recovery in consumption was much stronger than expected earlier in the pandemic because households quickly adapted to the pandemic shock with the support of significant fiscal and monetary policy measures. This article examines household spending during the pandemic using a range of sources of information that have enabled the Reserve Bank of Australia to track consumption in a timely way.

COVID-19, households, modelling
Australian Economy
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COVID-19 Health Risks and Labour Supply

Nalini Agarwal and James Bishop

There is evidence that concerns about becoming infected with COVID-19 at work have affected people's willingness to participate in the labour force in some countries. This article examines whether similar health concerns have contributed to a reduction in labour supply in Australia. It finds no evidence that these concerns had a discernible effect on labour supply during the COVID-19 outbreaks in 2020 and 2021. In early 2022, however, the substantial escalation in cases of the Omicron variant led a small number of people to avoid the workplace, at least temporarily.

COVID-19, labour market, labour market
Australian Economy
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The Significant Shift in Australia's Balance of Payments

Nicole Adams and Tim Atkin

Over recent years Australia has seen a large shift in its external accounts. In contrast to long-running deficits, the current account balance has now been in surplus for over two years, supported by record trade surpluses. The corollary of this is that the level of national savings has surpassed investment and Australia has become a net exporter of capital. This article examines these changes and highlights some key trends that are associated with this shift. These include the decline of foreign direct investment following the end of the mining boom, as well as an increase in purchases of foreign equities by Australian superannuation and investment funds. These developments have contributed to a significant decline in Australia's net foreign liability position as a percentage of GDP, which is at its lowest levels in a number of decades.

capital, export, international, investment, payments, trade
Australian Economy
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Which Firms Drive Business Investment? New Evidence on the Firm-size Distribution

Lachlan Dynan

Business investment plays a key role in our current and future economic prosperity. Aggregate investment can be difficult to predict, however. This may be because different firms face different investment environments, and the factors behind their decisions can vary. This gives rise to the question: which types of firms are most important for driving aggregate outcomes? Detailed, firm-level data shows that large firms account for a significant share of investment in Australia, and are the major drivers of the patterns in aggregate non-mining investment. Understanding how firms of various sizes contribute to overall outcomes will help us to gauge the potential impact of any differences they might face, including via policies, on investment outcomes and the economy.

business, investment
Australian Economy
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Why Are Investment Hurdle Rates So Sticky?

Henry Edwards and Kevin Lane

Firms commonly evaluate potential investment projects by comparing expected returns to a hurdle rate. Survey evidence suggests that hurdle rates have remained high and well above the weighted average cost of capital (WACC) in recent years, as has the ex post return on invested capital for Australian-listed companies. This stickiness is a marked contrast to the decline in interest rates. This article reviews the evidence for why hurdle rates are so far above the WACC, and why they have remained so sticky over time. Proposed reasons include the perception that returns available on potential projects are unrelated to the level of interest rates. In addition, firms may avoid reducing hurdle rates to minimise the risk of regret, and some business managers could view long-term declines in interest rates as temporary.

business, capital, debt, interest rates, investment
Australian Economy
Photo: Reserve Bank of Australia

Do RBA School Talks Improve Student Outcomes?

Peter Rickards

As part of our education program, the Reserve Bank of Australia (RBA) conducts school talks to promote economic literacy and encourage a larger and more diverse group of students to study economics. To formally evaluate this aspect of our education program, we surveyed students before and after school talks in a randomised control trial and the results were assessed relative to a control group. We found that RBA school talks improve both perceived and actual understanding of key economic concepts and increase the confidence of students, including those who are less socially advantaged. Importantly, smaller talks conducted online were perceived to be just as useful as those conducted in person, which suggests that the geographic reach of the school talks program could potentially be expanded considerably without sacrificing quality or student outcomes.

education
Australian Economy
Photo: RBA Archives, PN-019030

The Central Bank's First Economist

Selwyn Cornish

In 1930, when officials from the Bank of England came to Australia to assist Australian governments with their budgetary problems, they found that the original Commonwealth Bank, then Australia's central bank, did not have an economist on its staff. They urged the Bank's Governor to appoint a qualified economist and recommended Leslie Melville, Professor of Economics at the University of Adelaide. Melville joined the Bank in March 1931. Some two decades later, when he left to become Vice-Chancellor at the Australian National University, Dr HC Coombs wrote to him saying that he had ‘made a contribution to the theory and practice of central banking which is without equal in the world’. As Melville's 100th birthday approached in 2002, the Australian National University decided to hold a public lecture in his honour. Governor Ian Macfarlane was invited to give the inaugural lecture. He concluded that Melville was ‘one of the most distinguished Australians of the past century’. The 20th Melville Lecture will be given in early 2022 by the Treasury Secretary, Dr Steven Kennedy. Ahead of this event, the latest records to be released in the Bank's new digital archive, Unreserved, include Melville's papers in digitised form. This article traces Melville's life and career, and his significance as the Bank's first economist.

banking, currency, history
Australian Economy
Photo: Marc Guitard – Getty Images

Climate Change Risks to Australian Banks

Kellie Bellrose, David Norman and Michelle Royters

Climate change affects banks because of the impact it has on the value of assets used as collateral for loans and the incomes borrowers use to repay their loans. There is significant uncertainty about the magnitude of risks to banks from climate change. This is because of the uncertainty about how climate change will alter future weather patterns, how policies will change globally and how economies adapt. This article uses one approach to provide preliminary estimates of the possible scale of risks climate change poses to banks' housing and business exposures. This approach suggests that a small share of housing in regions most exposed to extreme weather could experience price falls that might subsequently result in credit losses, but the overall losses for the financial system are likely manageable. Banks are also exposed to transition risks from their lending to emissions-intensive industries, but their portfolios appear to be less emissions-intensive than the economy as a whole. Further estimates of the impact of climate change on banks will be provided by the Climate Vulnerability Assessment currently being undertaken by the Australian Prudential Regulation Authority and the five largest banks.

banking, climate change
Australian Economy
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The Financial Cost of Job Loss in Australia

David Lancaster

Workers who lose a job tend to experience large and persistent earnings losses. On average, real earnings are around one-third lower in the year of job loss, and it takes at least four years for an individual's annual earnings to recover. Earnings losses are particularly persistent following the loss of a long-term job. Workers who find new employment tend to work fewer hours at lower hourly rates of pay.

COVID-19, labour market, labour market, wages
Australian Economy
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Underemployment in the Australian Labour Market

Mark Chambers, Blair Chapman and Eleanor Rogerson

Underemployment in Australia has been moving higher for several decades. This article reviews the trends that have been driving this, including the long-run increase in part-time employment and changes in how the labour market adjusts to fluctuations in labour demand. The article also discusses the implications of the upwards trend in the underemployment rate for assessing spare capacity in the labour market. One implication is that the unemployment rate may need to decline by more than has previously been the case before wage pressures start building strongly.

labour market, labour market, wages
Australian Economy
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The Transition from High School to University Economics

Gian-Piero Lovicu

To promote economic literacy and ensure the long-term health of the economics discipline, it is important to address the sharp decline in the size and diversity of the economics student population. Administrative data from the University Admissions Centre (UAC) provides information about how students transition from high school to university economics. These pathways suggest that interventions to increase the number and diversity of students studying economics in Year 12 can strengthen the pipeline of students into university economics. Interventions to improve the economic literacy of Year 12 economics students who are less socially advantaged are important to encourage more diversity in university economics; in contrast, female students appear to need less academic support and may instead benefit more from tailored interventions that pique their interest in and confidence with economics. More advocacy of economics should also increase its uptake at university, particularly among students already studying economics and/or a STEM subject in Year 12 and higher performers.

education
Australian Economy
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Understanding the East Coast Gas Market

Timoth de Atholia and Aaron Walker

Wholesale gas prices on the east coast have become linked to LNG export prices since 2015. This is because local gas producers can now sell into international markets through the 3 Queensland LNG export terminals. Wholesale prices will continue to be influenced by LNG export prices as long as this option is available. Contracted prices apply to the bulk of east coast gas demand and production. Contracted gas prices are likely to remain structurally higher than their pre-2015 levels over coming decades, reflecting higher marginal costs of domestic production.

export, resources sector
Australian Economy
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The Anatomy of a Banking Crisis: Household Depositors in the Australian Depressions

Gianni La Cava and Fiona Price

Looking into archival material can provide a new lens through which to view historical events. With the launch of Unreserved, the RBA has released archival records to the public, including longitudinal data on individual bank depositors that uncovers new facts about the behaviour of Australian households during the economic depressions of the 1890s and 1930s. Depositors responded to both depressions by withdrawing more money, consistent with households drawing down on their saving buffers in the face of rising unemployment and falling incomes. The net withdrawal rate of depositors also increased when deposit interest rates fell and when public confidence in the banking system deteriorated, with clear evidence of a run on a savings bank in the 1930s. In more normal times, most saving deposits were ‘sticky’ with transactions being very rare. This high degree of deposit stickiness appears to be because most people held these bank accounts to save for significant life events. While it is difficult to draw policy implications from the historical analysis, some features of the depositor behaviour are likely to hold true today.

banking, history, households, interest rates
Australian Economy
Photo: Reserve Bank of Australia Archives PN-000271

From the Archives: The London Letters

Jacqui Dwyer and Virginia MacDonald

The Reserve Bank has a rich and unique archives that captures almost 2 centuries of primary source material about Australia's economic, financial and social history. To enhance public access to these records, we have launched a digital platform, Unreserved. Unreserved enables users to browse information about our archival collection and directly access our digitised records. Unreserved will be regularly populated with new records as the digitisation of the Bank's archives progresses. The first release of records is a ‘sampler’ of the diversity of information in our archives. This article introduces Unreserved and highlights a particular series – the London Letters – which comprises the information exchanged between the Bank's head office and its London Office from 1912 to 1975. The London Letters provide insights into the development of Australia's central bank, along with its role and experiences during some of the most significant events of the 20th century.

banking, education, finance, history
Australian Economy
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Long-term Unemployment in Australia

Natasha Cassidy, Iris Chan, Amelia Gao and Gabrielle Penrose

Are your future employment prospects affected by past periods of unemployment? And does it matter how long you were unemployed? The average duration of unemployment has increased steadily over the 2010s. At the same time, the rate at which unemployed people are able to find a job has slowed. Long-term unemployed people are more likely to be older and male and have lower levels of formal education than those who have been unemployed for a shorter period. We use micro-level labour market data to show that future employment prospects are closely tied to the duration of unemployment: people who are unemployed for longer are less likely to find a job. We also find some evidence that an extended period of unemployment can harm people's employment chances for a long time afterwards.

labour market, labour market
Australian Economy
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The COVID-19 Outbreak and Australia's Education and Tourism Exports

Philipp Grozinger and Stephanie Parsons

International travel restrictions to contain the spread of COVID-19 and precautionary behaviour on the part of travellers have significantly disrupted the movement of people globally. Education and tourism were Australia's fourth and fifth largest exports prior to the pandemic, and exports of these services have fallen sharply. This article documents the effects of the virus on Australia's education and tourism exports and draws on information from the Reserve Bank's regional and industry liaison program to discuss the uncertainties around the medium-term outlook once international travel resumes.

COVID-19, education, export
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.

COVID-19, labour market
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.

COVID-19, housing
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, COVID-19, modelling, modelling, monetary policy
Australian Economy The hand of a woman inserts a coin into a piggy bank.
Photo: Nattakorn Maneerat / EyeEm – Getty Images

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.

COVID-19, debt, households, households, saving
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
Australian Economy An older male employee sits at a table talking to his younger colleagues.
Photo: Phil Boorman – Getty Images

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.

education, 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
Australian Economy The sun rises behind windmills and solar panels.
Photo: zhongguo – Getty Images

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
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.

capital, labour market, mining, monetary policy, technology
Australian Economy Family members spanning three generations gather outside.
Photo: xavierarnau, filadendron and Thurtell – Getty Images

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.

debt, finance
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.

education, history
Australian Economy The outlines of two miners and an excavator against a sun setting.
Photo: shotbydave – Getty Images

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.

education, labour market, mining, resources sector
Australian Economy Two IT experts look at a set of monitors displaying data
Photo: Tetra Images – Getty Images

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.

cash rate, education, financial markets, monetary policy
Australian Economy Workers during peak hour are crowding a pedestrian zone
Photo: Alex Segre – Getty Images

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.

labour market, payments, wages
Australian Economy The hands of a cashier retrieve banknotes from a till
Photo: Tom Werner – Getty Images

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.

business, retail, trade
Australian Economy Two construction cranes dominate the sky next to a mobile tower
Photo: Andrew Mckenna / EyeEm – Getty Images

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.

investment
Australian Economy Three employees work on large charts stuck to a transparent wall
Photo: Martin Barraud – Getty Images

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.

forecasting, inflation, labour market, modelling, wages
Australian Economy A long mining train snakes its way through dry country
Photo: Gangliu Maogg Tatomm – Getty Images

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, modelling
Australian Economy Two workers inspect a construction site, with a graph superimposed on the image.
Photo: Jessie Casson – Getty Images

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.

labour market, labour market, wages
Australian Economy A calculator, model of a house and keys are lying on a spreadsheet.
Photo: Witthaya Prasongsin – Getty Images

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.

housing
Australian Economy Pedestrians crossing a street are superimposed over a crane, skyscrapers and free-standing houses.
Photo: xavierarnau, mihailomilovanovic, Westend61 and tap10 – Getty Images

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.

capital, finance, housing, labour market, wages
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.

balance sheet, debt
Australian Economy
Photo: Sarote Pruksachat

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.

labour market, wages
Australian Economy
Photo: Hero Images

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
Australian Economy
Photo: Kasto80

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.

education, wages
Australian Economy
Photo: Ipopba

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.

business, labour market, technology
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.

inflation, labour market, wages
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, rba survey, technology
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.

labour market, 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.

capital, households, investment, 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.

capital, investment, mining, resources sector
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.

labour market, services sector
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.

labour market, wages
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.

debt, interest rates, securities
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.

forecasting, modelling, modelling

Reporting Australia's Foreign Reserve Holdings

Australian Economy
Chris Potter

The Reserve Bank of Australia reports details of Australia's official reserve assets, foreign currency liquidity and net foreign reserves on a monthly basis. This article details changes that will make the Bank's reporting methodology consistent with current guidelines published by the International Monetary Fund (IMF). Data will be revised back to January 2015. While the new methodology implies a reduction in the reported gross level of Australia's official reserve assets, net foreign reserves will remain unchanged.

currency, exchange rate, international, liquidity

The Transmission of Monetary Policy: How Does It Work?

Australian Economy
Tim Atkin and Gianni La Cava

The transmission of monetary policy refers to how changes to the cash rate affect economic activity and inflation. This article outlines the stages of transmission and the channels through which it occurs. The effects of monetary policy are hard to quantify, though the housing market seems particularly important to the transmission process in Australia. A lower cash rate stimulates household spending and housing investment, partly through increasing the wealth and cash flow of households. A lower cash rate also tends to result in a depreciation of the exchange rate, leading to higher net exports and imported inflation.

education, inflation, interest rates, monetary policy

The Rising Share of Part-time Employment

Australian Economy
Natasha Cassidy and Stephanie Parsons

One of the most significant changes to the Australian labour market in recent decades has been the rise in the share of part-time employment to account for nearly one-third of total employment. This article details the various supply and demand factors that have underpinned the increase in part-time employment, as well as some of the characteristics of part-time workers. Because there are some part-time workers who want to work additional hours, it is useful to consider underemployment as well as unemployment in measuring labour market spare capacity.

labour market, wages

The Resources Economy and the Terms of Trade Boom

Australian Economy
Sean Langcake and Emily Poole

The transition from the investment to the production phase of the resources boom is nearly complete. The adjustment has affected industries beyond the resources sector, which has amplified the impact of the resource investment boom on the Australian economy. The value added and employment shares of this broader ‘resources economy’ have retreated from their 2011/12 peaks, but remain above their pre-boom averages.

investment, mining, resources sector, terms of trade

Covered Bonds in Australia

Australian Economy
Benjamin Watson

Since their introduction in Australia in 2011, the stock of covered bonds has grown to around $80 billion, or around 15 per cent of Australian financial institutions' long-term debt. Covered bonds are a form of secured funding backed by both the issuer and a specific pool of assets. In practice, covered bonds are typically issued by banks and secured against pools of residential mortgages. Since they are secured against assets, covered bonds provide increased protection for lenders. As a result, they can be issued at lower yields and longer tenors than unsecured bonds and can be easier to issue during periods of market stress. However, covered bonds can reduce the protection of other unsecured creditors who then may require extra return.

bonds, financial markets, funding

Housing Accessibility for First Home Buyers

Australian Economy
Gianni La Cava, Hannah Leal and Andrew Zurawski

The ability of Australians to purchase their first home (‘housing accessibility’) has been an important topic of public debate recently. In this article, we construct an indicator of housing accessibility that suggests that the median potential first home buyer can currently afford about one-third of homes in Australia. However, accessibility varies significantly with geographic location, and the quality of housing affordable to potential first home buyers has declined, particularly in Sydney.

debt, housing, income and wealth

Houses and Apartments in Australia

Australian Economy
Tom Rosewall and Michael Shoory

Apartments have become an important part of the housing mix in Australia. This has several implications for assessments of residential activity. The lag from a change in monetary policy to the effect on residential activity might increase, because it takes longer to build large apartment buildings than detached houses. Apartment developments use different construction materials and labour, and may face different cost pressures to the detached house segment. They also face different supply-side constraints.

housing, inflation, interest rates, investment

Estimating the NAIRU and the Unemployment Gap

Australian Economy
Tom Cusbert

Spare capacity in the labour market is an important input into forecasts of inflation and wage growth. This article describes how the Bank estimates one measure of spare capacity in the labour market – the gap between the unemployment rate and the non-accelerating inflation rate of unemployment (NAIRU). Model estimates of the NAIRU are highly uncertain and can change quite a bit as new data become available. The estimates suggest that the NAIRU has declined since the mid 1990s and is currently around 5 per cent.

inflation, labour market, wages

Australian Capital Flows

Australian Economy
Susan Black, Blair Chapman and Callan Windsor

Capital inflows have underpinned the expansion of Australia's productive capacity for the past 200 years or more. Recently, there have been three noteworthy changes in the composition of these flows. First, most inflows to the mining sector are now direct funding from offshore, rather than reinvested earnings. Second, foreign investors have been more actively managing their holdings of Australian government debt securities. Third, regulatory reforms have led to changes in banks' short-term debt funding.

balance sheet, capital, export

The Recent Economic Performance of the States

Australian Economy
Thomas Carr, Kate Fernandes and Tom Rosewall

Economic growth in Australia's south-eastern states has underpinned a gradual strengthening in the non-mining economy in recent years. In contrast, economic conditions have been weaker in Western Australia and Queensland as the large-scale mining investment in these states has concluded. Differences in investment have been a key source of regional variation in activity, but there are also common themes across a range of economic indicators, such as growth in the services sector.

households, investment, mining

Insights into Low Wage Growth in Australia

Australian Economy
James Bishop and Natasha Cassidy

Recent low wage growth in Australia appears to be only partly explained by spare capacity in the labour market, the decline in inflation outcomes and the decline in the terms of trade from its 2011 peak. In this article, we present some tentative evidence that the relationship between wage growth and labour market conditions may have changed, and that this may help to explain recent low wage growth. Using job-level micro wage data, we also find that, since 2012, wage increases have been less frequent and wage growth outcomes have become much more similar across jobs.

inflation, labour market, wages

Housing Market Turnover

Australian Economy
Hannah Leal, Stephanie Parsons, Graham White and Andrew Zurawski

The rate of housing market turnover, an important indicator of housing market conditions, has trended lower since the early 2000s. This is partly because households are moving less often and fewer own their own homes. More recently, the increase in apartment building is likely to have resulted in measured turnover being understated. A lower housing turnover rate could reduce housing-related economic activity and might lead to lower household leverage than otherwise.

finance, households, housing, income and wealth

The Sensitivity of Personal Income to GDP Growth

Australian Economy
Tahlee Stone

This article examines how the income of different individuals varies in response to changes in the state of the economy using individual-level data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey. More specifically, the article explores which types of income earners (those in the top, middle or bottom of the income distribution) and which sources of income (labour or capital) are most affected by economic conditions. Results suggest that the incomes of bottom- and top-income earners are the most sensitive to the state of the economy, although for different reasons: during strong economic conditions, the labour income of bottom-income earners rises, due to lower unemployment, while the capital income of top-income earners also rises, due to higher dividend and interest earnings. The effect on bottom-income earners appears to be stronger than that on top-income earners, suggesting that income inequality declines when economic conditions are strong.

capital, income and wealth, labour market

Factors Affecting an Individual's Future Labour Market Status

Australian Economy
Michelle van der Merwe

This article examines the ways in which someone's characteristics and circumstances in one year affect their probability of being in a particular labour market state in the next year. People are more likely to be employed next year if they are currently employed and have tertiary qualifications. In contrast, they are more likely to be unemployed or outside the labour force if they have a long-term health condition, have not completed high school or are a migrant from a non-English-speaking background. Additionally, the article considers the changing importance of determinants over time, noting the role that changes in individual and household preferences as well as broader macroeconomic conditions are likely to have played.

labour market

Measures of Inflation Expectations in Australia

Australian Economy
Angus Moore

Inflation expectations have an important influence on wage growth and price inflation. Expectations differ across agents and time and, accordingly, the Reserve Bank monitors a range of measures. This article discusses why inflation expectations are important for inflation and economic activity, the measures that exist in Australia and various issues affecting their interpretation. The financial markets that are used to calculate some measures of inflation expectations are not particularly liquid in Australia, and the financial measures also include an inflation risk premium; these issues can affect the interpretation of movements in the series.

financial markets, forecasting, inflation, rba survey

Sensitivity of Australian Trade to the Exchange Rate

Australian Economy
Duke Cole and Samual Nightingale

The exchange rate is an important determinant of Australian exports and imports. Movements in the exchange rate affect the relative prices of traded goods and services, and thus the competitiveness of domestic producers of exports and import-competing goods and services. This article provides estimates of the sensitivity of Australian exports and imports to changes in the exchange rate at the aggregate and component level. Other things equal, a 10 per cent depreciation in the real exchange rate is estimated to increase export volumes by around 3 per cent and decrease import volumes by about 4 per cent after two years, which implies a cumulative net exports contribution to gross domestic product (GDP) of around 1½ percentage points over this period. However, the aggregate responses of exports and imports disguise substantial variation in the responses of the components. Trade in services is generally more responsive to movements in the exchange rate than trade in goods, although it takes longer for the full effect to be seen in services trade volumes.

exchange rate, export, trade

The Household Cash Flow Channel of Monetary Policy

Australian Economy
Helen Hughson, Gianni La Cava, Paul Ryan and Penelope Smith

Changes in interest rates can affect household spending by directly affecting households' interest income and payments and, in turn, the amount of cash that households have available to spend. This is typically referred to as the ‘household cash flow channel of monetary policy’. Household-level data provide evidence that the cash flow channel operates both for households that are net borrowers and for those that are net lenders, though the effect on borrowers is estimated to be much stronger than the effect on lenders. Overall, changes in household cash flow appear to be an important channel through which lower interest rates can stimulate greater household spending.

cash rate, households, interest rates, monetary policy

Household Wealth in Australia: Evidence from the 2014 HILDA Survey

Australian Economy
Paul Ryan and Tahlee Stone

This article uses data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey to assess how the distribution of wealth changed for Australian households between 2010 and 2014. Average household wealth increased modestly over that period, driven mainly by growth in the value of financial assets, most notably superannuation. The growth of housing wealth was slow in comparison, particularly in Queensland and Western Australia. While most of the changes in wealth were broadly based across households, wealth increased more rapidly for those residing in New South Wales and for retired households with large holdings of superannuation and equity assets.

debt, households, housing, income and wealth

Why Has Retail Inflation Been So Low?

Australian Economy
Alexander Ballantyne and Sean Langcake

Inflation in the price of retail goods has been surprisingly low for a number of years. The considerable depreciation of the Australian dollar over this period by itself would typically have led to higher retail inflation. This article considers whether the direct relationship between the exchange rate and retail inflation has changed, or if other developments in the retail supply chain can account for recent trends in retail inflation. There is little statistical evidence that the relationship between the exchange rate and retail inflation has changed. Discussions with retailers in the Reserve Bank's business liaison program suggest that an intensification of competition in the retail sector and firms' efforts to reduce costs along their supply chain are likely to have contributed to low retail inflation.

exchange rate, inflation, retail

The Growth of Apartment Construction in Australia

Australian Economy
Michael Shoory

Apartments have become an increasingly important contributor to new dwelling construction over recent years and in 2015 accounted for more than one-third of all residential building approvals. The majority of recent apartment construction has been located in Sydney, Melbourne and Brisbane. Across these cities there have been differences in geographical concentration, the types of buyers purchasing the dwellings and supply-side factors such as planning frameworks. The increase in apartment construction has reflected a range of factors, including the nature of land supply constraints and affordability considerations, together with a desire to reside in close proximity to employment centres and amenities. Given that these factors are likely to persist, apartments are expected to continue to play an important role in providing new housing supply.

housing, investment

Conditions in the Manufacturing Sector

Australian Economy
Sean Langcake

Manufacturing output and employment have fallen steadily as a share of the Australian economy for the past three decades. This article looks at the composition of the sector and draws on the Reserve Bank's liaison with manufacturers to provide an insight into some of their responses to the structural challenges in recent years. According to liaison, the increase in the supply of manufactured goods from low-cost sources abroad, exacerbated by the appreciation of the Australian dollar during the period of rising commodity prices, impaired the viability of many domestic manufacturers and precipitated the closure of some manufacturing production over the past decade. While the recent exchange rate depreciation has helped to improve competitiveness of Australian producers, so far there is only limited evidence of a recovery in manufacturing output and investment.

export, international, investment, trade

The Labour Market during and after the Terms of Trade Boom

Australian Economy
Kathryn Davis, Martin McCarthy and Jonathan Bridges

During the terms of trade boom, strong growth in output prices meant that the real cost of labour declined from the average firm's perspective and demand for labour increased. At the same time, the appreciation of the exchange rate helped contain the increase in consumption prices, so the purchasing power of employees' earnings rose and growth in the labour force picked up. Australian employment grew strongly and the unemployment rate fell.

business, households, labour market, mining, terms of trade

Cyclical Labour Market Adjustment in Australia

Australian Economy
James Bishop and Michael Plumb

Since the late 1990s, a larger share of labour market adjustment in Australia has come about via changes in average hours worked, as opposed to changes in the number of people employed. Much of this is likely to reflect that the economic downturns in the 2000s were relatively short and shallow compared with the recessions in the 1980s and 1990s. Had these later downturns been more severe, firms may have needed to shed more workers. It is also possible that labour market reforms over recent decades have provided firms with more scope to reduce labour costs by reducing working hours and wage growth rather than by reducing headcount. Consistent with these explanations, an important driver of cyclical adjustments in average hours during downturns looks to have been reductions in hours worked for employees who remained in the same job, as opposed to changes in the composition of aggregate employment.

labour market, wages

The Rise in Dividend Payments

Australian Economy
Michelle Bergmann

Dividends paid by Australian listed companies have grown substantially since the global financial crisis, most notably among large resources companies and the banks. These increases have occurred alongside modest growth in earnings. Dividend-paying companies appear to generally smooth these payments, having been reluctant to reduce their dividend payments in particular. The increase in dividends over recent years could reflect an increase in shareholder preferences to receive income payments or a perception among company managers that there are fewer viable investment opportunities; the data offer some modest support to both of these hypotheses.

banking, finance, securities

Consumer Sentiment Surveys

Australian Economy
Jin Cong Wang and Laura Berger-Thomson

There are two main consumer sentiment surveys in Australia. The headline indices that summarise the survey results appear to provide relevant and timely information about economic developments, particularly around turning points. However, in some cases, particular components of the aggregate indices are more useful. This is true of the components that track households' perceptions of their current personal finances compared with a year prior and, to a lesser extent, the components tracking households' perceptions of buying conditions for major household items.

households, income and wealth

Firm-level Capacity Utilisation and the Implications for Investment, Labour and Prices

Australian Economy
Kevin Lane and Tom Rosewall

Business surveys provide a timely read of the average rate of capacity utilisation at Australian firms. However, discussions with company managers in the Reserve Bank's business liaison program reveal considerable variation in how ‘capacity utilisation’ is interpreted. This variation is important, as it affects the interpretation of survey measures of capacity utilisation and their implications for firms' resourcing needs and pricing decisions. For firms in the more capital-intensive goods-related industries, a high level of capacity utilisation may reveal an impetus to hire more labour and to invest in the capital stock, while for services firms it is more likely to reflect an incentive to hire more labour only. Consequently, movements in aggregate measures of capacity utilisation are likely to contain information about the labour market, while the implications for business investment are likely to be identified at a more granular level. Much of the recent increase in survey measures of capacity utilisation has been driven by services firms. In contrast, capacity utilisation remains relatively low for firms in goods-related industries, which may help to explain why aggregate capital expenditure has remained subdued.

business, capital, investment, labour market

Housing Wealth Effects: Evidence from New Vehicle Registrations

Australian Economy
Christian Gillitzer and Jin Cong Wang

This article investigates the relationship between housing wealth and consumption using postcode-level variation in housing prices and new passenger vehicle registrations as a proxy for consumption at a postcode level. It is estimated that a one per cent increase in housing wealth is associated with about half a per cent increase in new passenger vehicle registrations – the consumption indicator. But because new vehicle consumption is likely to be particularly sensitive to changes in housing wealth, the results suggest a relatively modest relationship between housing wealth and total consumption.

housing, income and wealth

Long-run Trends in Housing Price Growth

Australian Economy
Marion Kohler and Michelle van der Merwe

This article examines the factors driving long-run trends in Australian housing price growth over the past three decades. During the 1980s, housing prices grew broadly in line with general price inflation in the economy. The period from the 1990s until the mid 2000s saw relatively strong housing price growth associated with a significant increase in the debt-to-income ratio of Australian households. Since the mid 2000s, strong population growth has played an increasing role in explaining housing price growth.

debt, housing, income and wealth, inflation

Lower Bulk Commodity Prices and Their Effect on Economic Activity

Australian Economy
Adam Gorajek and Daniel Rees

Recent declines in bulk commodity prices have reduced the growth of household income, company profits and government revenues. The declines have been associated with a contraction in mining investment and, by lowering the growth of aggregate demand, have restrained non-mining business investment. At the same time, a number of factors are helping to offset the effects of declining commodity prices. These include accommodative monetary policy and the depreciation of the exchange rate. Also, after saving some of the mining boom proceeds, households appear to be reducing their rates of saving to maintain consumption.

commodities, export, households, mining

Why Is Wage Growth So Low?

Australian Economy
David Jacobs and Alexandra Rush

Wage growth has declined markedly in Australia over the past few years. At the same time, stronger growth in labour productivity has worked to contain growth in labour costs. These developments reflect several factors, including spare capacity in the labour market, a decline in inflation expectations, a lower terms of trade and the need for the real exchange rate to adjust to improve international competitiveness. The size of the decline in wage growth has been larger than simple historical relationships would suggest, which might be explained by various characteristics of the current episode.

exchange rate, labour market, productivity, terms of trade, wages

The Economic Performance of the States

Australian Economy
Sam Nicholls and Tom Rosewall

Over the past decade, the mining investment boom in resource-rich states accounted for much of the difference in the pace of economic growth across states. More recently, there has been a gradual rebalancing of growth, though the transition has been uneven. Housing market activity has picked up and this has been accompanied by stronger consumption growth, particularly in New South Wales and Victoria. State labour market conditions have generally softened and the unemployment rate is elevated in all states.

households, investment, mining

Insights from the Australian Tourism Industry

Australian Economy
Corrine Dobson and Karen Hooper

Conditions in the tourism industry mirror many of the broader economic trends observed in the rest of the economy because tourism expenditure is discretionary and, like all trade-oriented industries, the tourism industry is exposed to developments in overseas markets and movements in the exchange rate. Over recent years, the Australian tourism industry has experienced challenging conditions. However, the fundamental conditions facing the industry have become more favourable, supported by improved economic conditions in key North Atlantic markets and the depreciation of the Australian dollar, as well as continued strong growth in tourism exports to China. This article examines recent developments in Australia's tourism industry and how these relate to broader economic conditions.

china, export, global economy, international

Cycles in Non-mining Business Investment

Australian Economy
Stephen Elias and Craig Evans

Growth in private non-mining business investment has been quite subdued over the past few years relative to the cyclical upswings seen in the 1980s and 1990s. Part of this weakness can be explained by cyclical factors that affect investment – such as a more moderate pace of growth in the output of, and demand for, non-mining goods and services. Further, the increasing importance of sectors of the economy that require less physical capital is likely to have weighed on non-mining investment in recent years. Nonetheless, non-mining investment is expected to pick up over time, supported by a gradual increase in the growth of domestic demand and accommodative monetary conditions.

business, investment

Labour Movements during the Resources Boom

Australian Economy
Mary-Alice Doyle

Resource construction employment grew rapidly during the investment phase of the resources boom. However, both investment and employment in the resources sector peaked in 2013 and are expected to decline over coming years. A range of sources suggest that the earlier increase in resource construction employment largely drew on workers with experience in other types of construction, and that demand for their skills from other sectors is expected to be relatively strong in coming years. As a consequence, resource construction workers are generally expected to be able to find employment outside of the resources sector.

business, investment, labour market, resources sector

The Effect of the Mining Boom on the Australian Economy

Australian Economy
Peter Tulip

This article presents estimates of the effects of the mining boom using a macroeconometric model of the Australian economy. The mining boom is estimated to have boosted real per capita household disposable income by 13 per cent over the decade to 2013. The boom contributed to a large appreciation of the Australian dollar that has weighed on other industries exposed to trade, such as manufacturing and agriculture.

exchange rate, households, mining, modelling

The RBA's Business Liaison Program

Australian Economy

The Reserve Bank meets regularly with businesses and associations in every state and across industries of the Australian economy. The information collected under the liaison program complements that available from official sources and helps the Bank to monitor cyclical and structural developments, as well as the effect of unusual events on the Australian economy. The broad messages gathered through liaison are incorporated into the Bank's policy discussions and public communications.

business, rba survey

Unemployment and Spare Capacity in the Labour Market

Australian Economy
Alexander Ballantyne, Daniel De Voss and David Jacobs

The unemployment rate provides an important gauge of spare capacity in the labour market and the economy more generally. However, other factors also affect unemployment, which complicates its interpretation when informing monetary policy. Statistical methods can be used to estimate the extent to which the unemployment rate reflects spare capacity versus more enduring structural factors. This involves estimating the NAIRU. Information can also be gleaned from the composition of unemployment, as jobseekers with certain characteristics may be more indicative of spare capacity than others. These approaches suggest that spare capacity in the labour market has increased over the past few years but remains well below that which prevailed over much of the 1990s.

inflation, labour market, wages

The Determinants of Non-tradables Inflation

Australian Economy
David Jacobs and Thomas Williams

This article examines the factors that explain inflation in prices of non-tradable items in the CPI. Non-tradable goods and services by definition have relatively little exposure to international competition. Consequently, their prices are more likely to be influenced by developments in the domestic economy, particularly the extent of spare capacity in both production and the labour market. A more granular breakdown of prices highlights the importance of conditions in individual markets, such as housing, as well as non-market influences on prices.

income and wealth, inflation

The Rise in Household Saving

Australian Economy
Fiona Price and Richard Finlay

This article investigates household saving behaviour in Australia and the drivers behind the sharp rise in saving that occurred in the late 2000s after an extended period of decline. Saving behaviour is important as, among other things, it influences household consumption, which accounts for a little over half of GDP. The rise in household saving appears to have been underpinned by precautionary motives, a reduction in expected future income gains for some types of households and an effort to rebuild wealth after the global financial crisis. Also, the long transition to higher levels of indebtedness may have run its course over this period, including perhaps because of a change in attitudes to debt. The ageing of the population does not appear to have played a significant role in recent changes in the saving ratio, although it may place downward pressure on saving over the years ahead.

households, income and wealth, saving

Foreign Investment in Residential Real Estate

Australian Economy
Maurice Gauder, Claire Houssard and David Orsmond

The available data, while incomplete, suggest that for much of the past decade or so approvals granted for foreign investment in the residential sector have remained around 5–10 per cent of the value of dwelling turnover in Australia, and perhaps half that share of the total number of dwellings turned over. The actual level of foreign purchases of dwellings has been significantly lower. Foreign purchases appear to be most concentrated in new rather than established dwellings, in higher- rather than lower-priced dwellings, in medium- and high-density dwellings rather than detached dwellings, and in inner-city areas of Sydney and Melbourne rather than other locations.

housing, investment

Why Has the Net Income Deficit Narrowed?

Australian Economy
Sara Ma

Between late 2010 and early 2013, Australia's net income deficit narrowed to its lowest point since the early 1990s. This article examines the reasons for this narrowing and finds that it was mainly due to declines in the average yields paid by Australian entities on their foreign debt and equity liabilities. The lower average yield paid on foreign debt liabilities reflects a combination of declines in Australian interest rates and an increase in the share of Australia's foreign debt attributable to the Australian Government, which pays a lower rate of interest than private sector borrowers. The decline in the average yield paid on foreign equity liabilities was largely due to declining profits for Australian resource sector firms over the period in question, as these firms have a relatively high degree of foreign ownership.

balance sheet, debt, finance

The Distribution of Household Spending in Australia

Australian Economy
Amy Beech, Rosetta Dollman, Richard Finlay and Gianni La Cava

This article uses household-level data to examine the distribution of spending and saving in Australia and how that has changed over time. The distribution of spending and saving is important as, among other things, it can affect the way that the household sector responds to economic shocks. The data indicate that households headed by older people have increased their share of total spending over the past two decades, reflecting both an ageing population and an increase in the average spending of older households compared with other households. The household survey data also indicate that spending is more equally distributed than income across households due to their ability to borrow and save. Moreover, consumption inequality has been little changed, despite an increase in income inequality over recent decades.

households, income and wealth

Employment Outcomes of the Economically Disadvantaged

Australian Economy
Michelle Cunningham, David Orsmond and Fiona Price

As part of its liaison program, the Bank meets with community organisations to discuss the labour market and other opportunities and challenges faced by economically disadvantaged persons in Australia. The data available suggest that economic conditions faced by the disadvantaged generally improved over the years leading up to the global financial crisis, though they have deteriorated somewhat since then. Nonetheless, around half of those who were economically disadvantaged in 2005–06 had moved out of this category by 2011–12. Finding employment was an important pathway out of economic disadvantage, although this outcome depended in part on a person's skills and the type of job obtained. The majority of people who remained economically disadvantaged over this period were not in employment, and community organisations note that many of them face a range of structural barriers to finding employment.

income and wealth, labour market

Inflation and the Cost of Living

Australian Economy
David Jacobs, Dilhan Perera and Thomas Williams

This article looks at increases in the cost of living for Australian households over the past decade. Inflation as measured by changes in the consumer price index (CPI) overstates ‘true’ increases in the cost of living due to a number of inherent conceptual differences and measurement issues. Even so, other measures of the cost of living have increased by a similar amount to the CPI over the past decade. Measured inflation has been higher for some households and socio-economic groups than for others, though the differences have generally not been large and have tended to even out over time. Although cost-of-living inflation has been moderate across most households, there are a number of reasons why some households might have perceived inflation to be higher than it actually was.

households, housing, income and wealth, inflation

Exchange Rate Movements and Economic Activity

Australian Economy
Marion Kohler, Josef Manalo and Dilhan Perera

This article discusses estimates of the effect of movements in the real exchange rate on economic activity and inflation in Australia. The range of estimates suggests that a temporary 10 per cent depreciation of the exchange rate increases the level of GDP temporarily by ¼–½ per cent over one to two years. A permanent 10 per cent real depreciation is estimated to increase the level of GDP by around 1 per cent after two to three years and to increase year-ended inflation by ¼–½ percentage point over the same period. At an industry level, unsurprisingly, activity in trade-exposed industries is found to be more affected than in domestically oriented industries.

exchange rate, inflation, international, trade

Australia after the Terms of Trade Boom

Australian Economy
Tim Atkin, Mark Caputo, Tim Robinson and Hao Wang

The Australian economy has in recent years experienced the longest terms of trade boom in its history. This boom has had important macroeconomic outcomes – such as an elevated real exchange rate, large-scale investment in the resources sector and higher national income. The terms of trade have declined since their peak in September 2011 and are expected to ease further in coming years. This article draws extensively on Atkin et al (2014) and compares recent macroeconomic developments to those that occurred historically around major peaks in the terms of trade, while also highlighting key differences in the nature of the current cycle and the macroeconomic policy framework compared with those in the past.

commodities, financial stability, mining, resources sector, terms of trade

Realisation Ratios in the Capital Expenditure Survey

Australian Economy
Leon Berkelmans and Gareth Spence

The Australian Bureau of Statistics capital expenditure survey is one of the inputs into the Reserve Bank's forecasts for private business investment. This article considers several methods for interpreting the expectations data from this survey and evaluates these methods using out-of-sample forecasts. Forecasts based on long-run average realisation ratios are found to be the most accurate of the options considered, although the use of these forecasts for predicting investment in the national accounts yields mixed results.

business, business cycle, capital, forecasting, investment

Indicators of Labour Demand

Australian Economy
Kim Edwards and Linus Gustafsson

There are several indicators of labour demand that can be used to assess labour market conditions and as inputs into forecasts of employment growth. These include measures of job vacancies, job advertisements and business surveys of employment intentions. Over the past year, there have been pronounced declines in a number of these indicators and employment growth has been somewhat subdued. This article suggests that as well as being a source of information on current labour market conditions, these indicators provide some leading information on employment growth, although the forecasting performance of models including these indicators is only slightly better than that of a simple benchmark model.

business, forecasting, labour market

Partial Mortgage Prepayments and Housing Credit Growth

Australian Economy
Marc-Oliver Thurner and Alexandra Dwyer

Changes in lending rates have an important influence on the pace at which households prepay their mortgages. This has implications for housing credit growth. The effect of the fall in lending rates since October 2011 on prepayments is by itself estimated to have led to a ½ to ¾ percentage point reduction in year-ended housing credit growth as of June 2013.

banking, credit, debt, households, housing

Australian Exports: Global Demand and the High Exchange Rate

Australian Economy
Tim Atkin and Ellis Connolly

Growth in Australian exports was weaker than had been expected over the past 10 years across all major categories: resources, rural, manufactures and services. While exports of bulk commodities and liquefied natural gas (LNG) grew strongly in response to higher demand from Asia, this was partly offset by declines in exports of oil and processed metals. Non-resource exports have been adversely affected by the appreciation of the exchange rate and the ongoing rise in the share of global production occurring in emerging economies. Looking ahead, the surge in mining-related investment since the mid 2000s is expected to lead to stronger growth in resource exports over the next five years. As incomes grow further in emerging Asia, demand for Australia's exports of food products, high-skilled manufactures and services is also expected to rise.

exchange rate, export, global economy

The Business Services Sector

Australian Economy
Josef Manalo and David Orsmond

The business services sector has become increasingly important in the Australian economy. The strong growth in its output and employment has been largely driven by demand for the professional, scientific and technical inputs that firms in this sector provide to other businesses. This, in turn, has reflected increased demand for the output of highly skilled labour by the mining industry and other parts of the economy, the increased use of outsourcing, and a range of technological developments.

business, labour market, mining, services sector, technology

GDP Revisions: Measurement and Implications

Australian Economy
James Bishop, Troy Gill and David Lancaster

Gauging economic conditions in real time is challenging, in part because economic data are difficult to measure and subject to subsequent revision as more information becomes available. This article investigates the pattern and size of revisions to real gross domestic product (GDP) over the past decade or so. Revisions to early estimates of GDP can be large and, over the past 15 years, have tended to increase measured growth, although the extent of revision is in line with international experience. This article also examines the feasibility of adjusting real-time estimates of GDP for apparent patterns in revisions, predicting future revisions and calculating confidence intervals around the historical data. The uncertainty around real-time GDP estimates highlights the importance of monitoring a wide range of information when assessing current economic conditions.

households

Changes to the RBA Index of Commodity Prices: 2013

Australian Economy
Tim Robinson and Hao Wang

This article summarises changes to be made to the RBA Index of Commodity Prices (ICP). In line with developments in export values over recent years, the weight of iron ore in the index will increase, while the weights for coal, gold and base metals will be reduced. Overall, these changes will result in minimal revisions to the ICP. Given the greater attention being paid to bulk commodities in economic assessments, the Bank will publish additional indices that will capture movements in the spot prices and average export prices of these commodities.

commodities, export

The Resources Boom and the Australian Economy: A Sectoral Analysis

Australian Economy
James Bishop, Christopher Kent, Michael Plumb and Vanessa Rayner

The increase in Australia's terms of trade since the mid 2000s gave rise to a surge in resource investment, an appreciation of the exchange rate, and a reallocation of labour and capital in the economy. This article examines the impact of the resources boom on the Australian economy in terms of three broadly defined sectors: the resources sector, the ‘other tradable’ sector and the non-tradable sector. While not all parts of the economy have benefited, the process of adjustment has proceeded much more smoothly than has been the case in previous terms of trade booms.

commodities, mining, resources sector, terms of trade

The graphs in the Bulletin were generated using Mathematica.

ISSN 1837-7211 (Online)