By David Bassanese

Sadly after more than two decades without a serious recession the level of complacency among policy makers in both Canberra and Martin Place has reached inordinately high levels.

Australia is living through what I’d call the era of diminished expectations.  

Economic growth is mediocre and corporate profits have been flat for several years. Our share market is underperforming global peers and even the United States has an unemployment rate lower than ours. 

In a speech to financial market economists last week, a Deputy Secretary to the Treasury, Nigel Ray noted “the latest national accounts showed that the economy recorded its third straight year of below trend growth in 2014-15. This means Australia is now in a prolonged period of below-par growth, the likes of which we have rarely seen outside of a recession.”

Our one great growth hope is that the Australian dollar sinks to such a low level that we’ll become a cheap enough place for international students and tourists to once again grace us with their presence.   

Yet all we hear is that we’re doing reasonably well.  Prime Minister Malcolm Turnbull is giving signs that tax reform will be only incremental, with serious changes to the goods and services tax off the agenda. Exactly what else he’ll propose to transform Australian into a nation of “innovation” remains to be seen.  I’m hoping Turnbull will be more like Keating (as Treasurer) and not Kevin Rudd – the latter being ultimately too scared to risk his popularity on challenging economic reform. 

Many take heart from the fact the unemployment rate has remained remarkably contained over the past year despite weaker than average economic growth.  But as investors we should not take much heart from that at all – as it implies potential growth for the economy is weaker than we thought. That’s not great news for corporate profits going forward and raises the risk that investors will start to reduce the earnings growth premium that has been priced into local shares over recent decades.

Indeed, it would be far better were unemployment rising today – as it would more clearly suggest economic growth is weaker than we’re capable of and would goad policy makers in both Canberra and Martin Place to take firmer action.

Up until recently, history suggested that the economy could growth by around 3.25% a year without placing downward pressure on the unemployment rate.  Yet according to Treasury’s Nigel Ray, the unemployment stabilising rate of economic growth now seems closer to 2.75% - and it will reach 2.5% by 2050.  

The current population slowdown seems to largely reflect fewer Kiwis seeing us as the jobs paradise we once seemed. Average hours worked also remains stubbornly weak - which in part could reflect the lifestyle preference of some workers, but might also reveal an entrenched level of underemployment.

I’d argue they’re not the only sources of weaker potential growth – weaker labour productivity growth in the wake of the mining bust also seems evident.  Employment growth is holding up reasonably well despite weak overall growth, because the main source of growth are low wage and low productivity jobs in the services sector.

Australia’s premier economics columnist – Ross Gittins of the Sydney Morning Herald doesn’t seem to care.  Ross has decidedly cooled on the benefits of economic growth in recent years and now seems to prefer a smaller Australia that makes less demands on the environment and our dilapidated infrastructure.  In his column on Saturday he downplayed Treasury’s recent downgrade to Australia’s potential economic growth to 2.75% by arguing “although the growth in workers helping to produce goods and services is likely to be lower than we thought, there'll also be fewer people we have to share those goods and services with. GDP per person shouldn't be much affected.”

With great respect to Ross, this implies there’s no relationship between total GDP growth and GDP per capita growth.  But there is a potential critical relationship between the two - as a high local population allows greater scale economies in production – which can lower per unit production costs. 

A higher population means many infrastructure projects – which entail high fixed costs – a more likely to be rendered economic to undertake, such a high speed rail between our major cities or greater exploration of alternative energy systems.  

A higher population also helps local business achieve scale economies in the local market and making them more competitive in the pursuit of global markets.  Lower growth also implies lower investment returns – interest rates on average will need to be lower, and growth in corporate earnings also somewhat less.  It will make saving for retirement even harder.

The reductio or Ross’s argument is that we could simply halt immigration altogether and allow productivity growth to fizzle out – as even if potential growth fell to zero our “per-capita” incomes would not be affected.  

I would venture our per capita incomes would be seriously affected, as business investment would plummet and more local companies would soon lose the scale economies needed to compete against cheaper imports, much less tackle export markets. 

Rather than accept slower economic growth we should be looking for opportunities to boost it – both via a potentially more generous immigration program, reduction in barriers to full-time workforce participation, and higher productivity growth.  Better regional development and cleaner energy sources would also reduce the apparent trade-off between economic growth and our environmental and infrastructure demands.  

But such is the malaise that Australia finds itself in we are settling for less rather than imagining what could and should be.