[HSC] Economist: 19–25 March
The week in review.
There were more jobs created in February, however the Australian labour market continues to exhibit substantial spare capacity. Additionally, the federal government looks close to finally getting their corporate tax cuts through the senate. Globally, an all out trade war seems more likely after Donald Trump imposed $60 billion worth of China, with China retaliating soon after.
Required Readings
- Australia’s unemployment rate increased in February despite more jobs being created.
- A United States vs. China trade war could have devastating implications for Australia.
- Will the government’s proposed company tax cuts have much of an impact?
1. Unemployment
February marked the seventeenth consecutive month of positive jobs growth in Australia, the longest streak since records began. However, the unemployment rate actually increased to 5.6% in February, with the underemployment rate also rising from 8.3% to 8.4%. These two movements meant that the underutilisation rate, calculated by summing the unemployment and underemployment rates, increased to 14.0%, indicative of considerable spare capacity in the labour market.
The 17,400 new jobs consisted of an increase in full-time positions of almost 65,000, but a loss of 47,500 part-time jobs. This continued the trend from 2017, when three-quarters of the jobs created were full-time positions. One of the key reasons why Australia’s unemployment rate increased despite the new jobs, was an increase in the participation rate, which rose from 65.6% to 65.7%, the highest level since 2011.
Australia’s 14.0% underutilisation rate suggests that wages will remain low for the foreseeable future. Historical data suggests that the underutilisation rate will need to fall towards 12% before wages pick up substantially. In turn, this reduces the likelihood of an RBA interest rate rise in the near future.
HSC Relevance
- Low wages growth remains the pre-eminent concern for the Australian economy and without a strong pickup in sight, it is likely that the RBA will maintain their current expansionary monetary stance for some time to come.
- Explain how a rise in the participation rate can lead to an increase in the unemployment rate.
2. Donald Trump’s Trade War
Donald Trump ramped up his protectionist trade policy this week by imposing a 25% tariff on a range of Chinese technology imports, worth up to $US60 billion. This comes after his decision to impose sizeable tariffs on steel and aluminium imports earlier in March. China quickly retaliated by proposing tariffs on American pork, wine, fruit and steel. China’s commerce ministry also commented on the developments, stating,
“China doesn’t hope to be in a trade war, but is not afraid of engaging in one.”
Further escalation of the dispute could be extremely damaging for Australia and the global economy. The Productivity Commission estimates that if a global trade war broke out, it would cost households $1500 per year and lead to the loss of 100,000 jobs.
HSC Relevance
- Explain how a global trade war would be damaging for Australia’s export and import-oriented industries, and in turn how it could worsen Australia’s economic growth and development.
3. Company Tax Cuts
The continuing debate about company tax cuts in Australia may be reaching a conclusion with the government looking set to finally get its way. The Turnbull government has been negotiating since 2016 to reduce the rate of company tax from 30% to 25% over a 10-year period. This policy will reduce government revenue by $65 billion, but should enable businesses to increase investment and employment.
However, the forecasted economic benefits seem fairly minimal, with Ross Gittins reporting the latest Treasury modelling findings,
“After 10 to 20 years, consumer welfare (arising mainly from higher wages) would be $150 per person higher than it otherwise would be.”
Furthermore, suggestions that leaving the company tax rate at 30% would lead businesses to up sticks, seem to be wide of the mark, with employment growth at record levels and increasing business investment.
HSC Relevance
- Discuss the economic impacts of a reduction in Australia’s company tax rate on the different components of aggregate demand.
- Why has the global movement towards lower company tax rates been described as a bidding war by Philip Lowe?
4. Elsewhere around the Globe
- The U.S. Federal Reserve decided to raise their target rate from 1.50% to 1.75%, marking the first time the U.S. rate has exceeded Australia’s cash rate since 2000.
- Annual inflation in the United Kingdom was measured at 2.7% in February, slightly below the 3.0% rate recorded previously. Meanwhile, unemployment in the UK fell to 4.3%, which is a 42-year low. Following the release of the inflation and labour market figures, the Bank of England decided to leave their Bank Rate unchanged at 0.5%.
- Japan recorded a narrow JPY 3 billion trade surplus in February, whilst their annual inflation rate increased from 1.4% to 1.5%.
Further Reading
This series of weekly articles aims to compile the important economic news of the week into bite-sized summaries with HSC-specific takeaways.
You can expect a new article every Sunday at 6pm!
