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Strong wages growth off the cards until unemployment closer to 4 per cent: Lowe




Unemployment may need to fall to levels not seen since before the Global Financial Crisis for workers to see a sizeable increase in pay, RBA governor Philip Lowe has said.

Shutting down growing calls for a rate hike in the process, Dr Lowe said in a speech on Wednesday that unemployment may need to fall to roughly 4 per cent – a level not seen since 2008 – before wages begin to pick up from the meagre 1.4 per cent growth rate recorded in 2020.

Only once annual wages growth more than doubles to more than 3 per cent – a level not seen since 2013 – will inflation increase enough to warrant raising the interest rate above 0.1 per cent, Dr Lowe said.

“Market pricing has implied an expectation of possible increases in the cash rate as early as late next year … this is not an expectation that we share,” Dr Lowe told the AFR Business Summit.

“We’re a long way from a world in which wages growth is running at 3 per cent plus.’’

Even the RBA’s own figures suggest the labour market will not achieve those conditions within the next three years.

Callam Pickering, APAC economist at jobs site Indeed, said that showed the central bank recognised monetary policy alone could not overcome the structural issues weighing down wages growth.

“It’s their acknowledgement that interest rates are going to be low for a very long time,” Mr Pickering told The New Daily.

“We shouldn’t expect any genuine pickup in these measures.”

Lowe: Four reasons wages are on ice

Dr Lowe on Wednesday highlighted four key issues putting wages growth on ice in developed economies around the world:

  1. “Increased competition in goods markets, which makes firms very conscious of cost increases
  2. “The trend towards more services being provided internationally
  3. “Advances in technology, which have reduced the demand for some types of skills and increased demand for others
  4. “Changes to the global supply of labour and regulation of labour markets.”

Independent economist Saul Eslake said Dr Lowe had identified the consequences of international economic trends since the 1980s, namely global competition and an erosion of worker bargaining power.

“There’s an almost universal awareness among workers in Australia … that potentially their jobs could be done in some other country for a lot less than they’re getting paid,” Mr Eslake told TND.

“Employers [also] know the goods and services they produce could be produced in other countries for less than they can produce them at, and that has in turn made them much more conscious of costs.”

Mr Pickering agreed, adding that unions, once a potent force in the battle for higher wages, are not as powerful as they once were.

“Union membership declines each and every quarter. It’s a big contributor to what we’re seeing,” he said.

If workers had greater bargaining power, wages growth would be higher than it currently is.’’

So, what are we going to do about it?

The RBA’s current strategy is to hold interest rates at record lows until unemployment falls low enough to spur stronger wages growth.

This is consistent with the strategy in the United States, which is trying to take its economy back to 2018-19 levels when unemployment was below 4 per cent, Mr Eslake explained.

“There was clear evidence [in the US] that wages growth was beginning to pick up,” he said.

RBA governor Philip Lowe is holding firm on low rates until wages pick up. Photo: AAP

In a question-and-answer session following his speech, Dr Lowe said the US was likely to drive down unemployment much faster than Australia – despite being ravaged by the pandemic – due to President Biden’s $US1.9 trillion ($2.47 trillion) fiscal stimulus package.

“Given the fiscal developments in the United States, they’ll get down to these low rates of unemployment before us,” Dr Lowe said.

“[We’ll] see what happens there and learn lessons from it.”

Dr Lowe said consumers are driving the recovery while businesses are dragging their heels.

Productivity also key in wage growth equation

Jeff Borland, a leading labour market expert and professor of economics at the University of Melbourne, said Dr Lowe clearly believed monetary policy could not do all the heavy lifting.

“[The RBA] has made it clear that the state of the macroeconomy is going to depend on fiscal policy more than monetary policy,” he told TND.

But Mr Borland said the outlook for real wages growth would depend more on labour productivity than the level of unemployment.

That’s because labour is more valuable to businesses when workers produce more output for each hour they are paid – income that feeds back into wages and capital.

Dr Lowe also highlighted the importance of productivity growth in the COVID-19 recovery, by spotlighting sluggish levels of business investment growth, which between 2010 and 2020 was 3 per cent below the three-decade average.

“This is a material difference and cumulates to slower growth in Australia’s capital stock, with implications for our longer-term productive capacity,” Dr Lowe said.

“A durable recovery from the pandemic requires a strong and sustained pick up in business investment.”

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‘Mountain of equity’: Millions of home owners could save thousands





If you’ve become a home owner in the past five years it might be worth getting an appraisal – you’re probably sitting on a “mountain of equity”.

As we’re all aware, house prices have soared lately. And while that’s bad news for rapidly worsening inequality, it also means those that do own a home could save money on their mortgages, upgrade their properties or even borrow to finance that renovation they’ve been wanting to get done.

Refinancing could save you thousands in interest repayments a year.

You’ll be in a particularly strong position if you’ve also been able to keep up with your mortgage repayments during COVID, because you now own a larger proportion of a house that has rapidly increased in value lately.

It’s a virtuous cycle that’s making the gap between the haves and have-nots much larger in Australia by pushing up property prices even faster.

Owner occupiers have been the keystone of the latest property boom, with most being existing owners upgrading their homes.

Who could blame them? RateCity research published this week finds an owner occupier in Sydney who bought at the median price in 2019 with a 20 per cent deposit has now seen their wealth increase by $402,000.

Apply the same conditions to Melbourne and wealth has risen $192,000.

This assumes property owners kept up with their mortgage repayments, which the majority of home owners have done while working from home and taking part in a $300 billion government cash splash during COVID.

“Millions of homeowners are sitting on a growing mountain of equity, some without even realising it,” RateCity research director Sally Tindall said.

How to benefit

If you’re in this situation, getting the value of your home appraised could be the first step to a better home loan or moving up the property ladder.

“If you’ve owned your own home for at least a couple of years, and have been diligent about paying down your debt, you could refinance to a lower rate,” Ms Tindall said.

“Lots of lenders offer interest rate discounts to new customers with loan-to-value ratios below 70 per cent, including ‘big four’ banks CBA and Westpac.”

What’s a loan-to-value ratio? Put simply, it’s the difference between the size of your home loan and the value of your property.

So, as an example, if your home is worth $1 million and your mortgage is $100,000 you have a loan-to-value ratio (LVR) of 10 per cent.

The lower your LVR the easier it will be to refinance your loan at a lower interest rate or borrow more to purchase a higher-value property.

First home buyers might also be able to remove the guarantor on their loan sooner than they thought because of rapidly increasing prices.

About 58 per cent of the lowest variable interest rates available are open only to those with deposits of 30 per cent or more, RateCity said.

In other words, rising property prices may have moved you into the club of home owners that can achieve lower interest rates on their mortgages.

A median Sydney property purchased on an 80 per cent LVR in 2019 could now be refinanced on an LVR as low as 55 per cent.

If those conditions are applied in Melbourne, LVR falls to 63 per cent.


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Here’s why Australians won’t be hit by the soaring gas prices we’re seeing overseas





Australians have dodged the bullet of skyrocketing gas prices currently hitting consumers in Europe and Asia.

While prices in the major gas hubs of those regions have spiralled up by a factor of five, in Australia a brief spike eased in September.

That means local consumers won’t be facing big jumps in household bills into next year.

Australian gas prices jumped in June and July after outages at coal-fired power plants in Victoria and Queensland boosted demand for gas generation.

That spike was short lived due to warm weather in some states and lockdowns in Victoria and NSW eroding demand, according to research by EnergyQuest.

“You’ve had warmer weather though the major capitals, the effects of the lockdowns and increased renewables, which reduced the demand for gas generation,” EnergyQuest CEO Graeme Bethune said.

Power prices fell

Those factors have also fed into power prices, with electricity costs falling in September in comparison with a year earlier.

What is interesting about the table above is that not only did average power prices drop, but the peak price charged by generators when power is in short supply also dropped.

That was despite the ongoing problems at the Victorian and Queensland power generators.

Part of the explanation is that there is increased output from renewables as rooftop solar grew, and new wind and solar generation came online.

That meant that gas power was called on less often to meet peak demand, which in turn held down power prices.

The inverse was true in Europe, where a 20 per cent fall in wind output over recent months helped run down gas supplies, contributing to the price spike, Mr Bethune said.

The future of power prices in part will depend on renewable output.

“If the wind blows strongly and there is plenty of sunshine across eastern Australia then it will keep pressure off gas prices,” Mr Bethune said.

The influence of renewables across the system in the last year is evident in this chart on power supplies.

Although wind has been stable in terms of its contribution to the power equation, outputs from hydro, solar farms and rooftop solar have risen.

The result is that coal has been pushed down from 65 per cent of power production to a record low of 60 per cent and that should help hold down both gas and electricity costs.

Even if offshore gas prices continue to spike Australian gas producers would not be in a position to push up local prices to match it.

“A lot of the export contracts for LNG [liquified natural gas] out of Queensland are set against the oil price and that has not risen by anywhere near the amount gas had,” Mr Bethune said.

“Then you have the federal government which has made clear to LNG exporters that they need to make enough gas available to the local market.

“They’re doing that regardless of the fact that they could make more money in the export market.”

Domestic users are supplied from long term contracts that cannot be easily changed when gas prices rise, so that would be another brake on prices.

However, while it is comforting to know local gas prices won’t spike to offshore levels, Australian consumers are still not getting as good a deal on prices as they should be, according to Bruce Mountain, Director of Victoria Energy Policy Centre at Victoria University.

“For small customers the gas price is not the big deal. The biggest things are the operation of the retail market and the costs levied by the owners of the gas-distribution pipes,” Professor Mountain said.

“Gas supply has been very profitable for the big gas companies.”

That was in part because consumers don’t bargain-hunt for retailers, and the charges levied to use the pipes and wires of the energy distributors are too high.

Regulators set these charges and could crack down on them but don’t, Professor Mountain said.

Since privatisation margins earned in energy distribution have increased dramatically.

Power distributor AusNet Services, under takeover offers from two groups, “is currently making a margin of 19 per cent – they’re far too profitable,” Professor Mountain said.

When power was distributed by [the state-owned] SECV there was a margin of 3 per cent on sales, Professor Mountain said.

Household power bills could be 15 per cent cheaper if the distribution businesses were less profitable, he said, with the situation similar for the gas sector.

But the move away from gas as a household fuel, necessary to reduce greenhouse emissions, will help deliver cheaper energy.

“Devices that use gas [for household tasks] are much less efficient that those using electricity,” Professor Mountain said.

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Scott Morrison talked Glasgow, China with News Corp boss over ‘after-dinner drinks’





Prime Minister Scott Morrison discussed the Glasgow climate summit, China and the Biden administration with News Corp executives in New York last month, the company’s global boss has told a Senate inquiry.

Appearing before a Senate probe into media diversity via video link on Friday, News Corp’s global chief executive Robert Thomson revealed he spoke with the PM about international affairs over “after-dinner drinks”.

Mr Morrison was in New York to represent Australia at United Nations’ talks.

Mr Thomson told the inquiry on Friday he presumed the PM wanted to meet because he knew “many” world leaders attending the UN summit.

“I had presumed he wanted some insight about some foreign policy matters,” Mr Thomson said.

Mr Thomson confirmed Mr Morrison didn’t meet News chairman Rupert Murdoch while in New York. He also claimed there was no discussion of the looming federal election.

Mr Thomson said the Glasgow summit came up “in passing” between the pair, but they didn’t talk about News Corp’s planned 16-page net-zero spread across its Australian publications, which has ignited a firestorm of criticism Down Under.

The main topics of discussion were Japan, China, Afghanistan and the “contours” of the Biden administration, Mr Thomson told the inquiry.

“The Prime Minister and I don’t necessarily agree on China,” he said.

Mr Thomson (on TV) said he presumed the PM wanted foreign policy insights. Photo: AAP

Mr Thomson was also asked by Labor senator Kim Carr about whether News Corp directed local editors to take positions on political issues.

Mr Thomson said News Corp’s New York executives had no involvement in recent features on net-zero carbon emissions and that its Australian editors weren’t told from the US what to write.

But he said the company did expect editors to operate within a certain philosophical framework.

“As a company, we have a philosophy about certain issues,” he said.

“We have a philosophy about individual freedom, about the role of the market, about the size of government.”

Mr Thomson said that – as a former editor – he had “discussions” with News Corp’s editors, but that they had a “large amount of local autonomy”.

Senator Carr and the inquiry’s chair, Greens senator Sarah Hanson-Young, grilled the News Corp executive on the publisher’s track record on climate, accusing its Australian papers of platforming climate deniers for more than a decade.

But Mr Thomson said News Corp has been consistent on climate dating as far back as 2004, citing Mr Murdoch’s 2006 statement that the “planet deserves the benefit of the doubt”.

News Corp Australia has just finished a two-week campaign of climate coverage that included its major Australian mastheads running 16-page spreads about net-zero emissions.

The series had many critics, who argued News Corp had a long-held editorial hostility on climate action, including attacks on past Labor government policies targeting emission reduction efforts.

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