Rising living costs and low wages are hints of a faltering economy

Contributed by Joe Montero

The cost of living is rising in Australia. Last week’s revealed figures are an increase of 6 percent in the cost of fruit, 13.5 percent for medical services, 4.9 percent for footwear,  4.9 percent for furniture, and  5.9 for petrol. This doesn’t include the ongoing rise in the cost of housing.

Wages are still not rising in nominal terms.  In real terms, that is, on what the dollar will buy, they have been going down. The gap between income and the cost of living is widening for most Australians. Poverty is on the rise.

It is tempting to blame everything Covid-19 but a comparison with similar countries belies  this. Out of the 38 members nations of the Organisation for Economic Cooperation and Development (OECD), Australia is ranking a miserable 32nd in terms of the rising cost of living. Only Iceland, Poland, Hungary, the United States, Mexico, and Turkey are ding worse.

The graph below shows that Australia’s  house prices, a good indicator of the cost of housing overall, have been rising above that the pack for years.

Meanwhile, profits overall have been on an upward trajectory. Even Covid didn’t stop it.  By March this year they had gone up 51.1 percent. And this is the point.

It seems absurd that profits can rise so much when economic activity slowed down during the pandemic.  Part of the explanation is that a big increase from the low position of the lockdown. If you consider the longer term trend, this is not much of an increase at all. Something else is going on.

The graph below charts Real Gross Domestic Product (GDP) growth in the years before the pandemic. The real GDP means the year on year trend and factors in the impact of price rises. Good and services growth has been stagnant and declining slowly.

Profit must them be coming from another source. The obvious one is that it is by paying less to the worker. We can add the rise in prices caused by a variety of factors, including monopoly power, speculation, and global impacts.

In this respect, it is missing the point to pin it on the incompetence and mismanagement of the Morrison government. Scott Morrison and company are doing exactly what they are supposed to be doing. They are satisfying the demands of its big end of town political base. They are the ones who are gaining.

From the bigger picture viewpoint of the future of the economy, it is a different story.  We are living on borrowed time. Insufficient economic activity to cover the scale of profit across the economy, means its foundations are eaten into and undermined.

The best indicator is the ratio between the average nominal profit and the amount invested. Although there are no official calculations, it is possible to make an estimate  by using ABS and other data. The Real GDP is a rule of thumb surrogate for the quantity of investment over  the quantity invested in constant and variable capital. This brought a rate of return of around 0.2 percent for the last financial year. Granted Covid made the figure beaker. Even taking this into account, it matches the pre-Covid pattern.

Unless there is a major turnaround, prospects are going  to get much worse.

This is where we must ask whether this is acceptable, and a new course for the Australian economy and society is called for?

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