Reserve Bank of Australia Annual Report – 1976 Economic Activity in Australia

The Australian economy experienced another year of high inflation and low activity in 1975/6. Aggregate demand was sluggish for much of the year but, due mainly to a turnaround in stockbuilding, and recovery in exports, showed some signs of quickening in the second half. Although imports continued to increase strongly during this period, domestic production also began to pick up. As a result the decline in total employment was checked; however, unemployment remained high at the year's end. Price increases during 1975/6 were less than in some previous periods but remained rapid.

13 National Income & Expenditure
MAJOR COMPONENTS^*, LOG SCALE,
SEASONALLY ADJUSTED, CONSTANT (1966/7) PRICES

Demand

Aggregate domestic demand, measured in constant prices and excluding stocks, declined for much of 1975/6; indications are that there was an increase in the final quarter of the year. Earlier, a turnaround in non-farm stockbuilding was reflected in a sharp rise in gross national expenditure, which rose by more than 2 per cent in the second half of 1975/6 and by about 0.5 per cent for the year as a whole.

Slowness of private business investment was a factor in the sluggishness of demand in the first half of 1975/6. Non-farm stocks continued to fall, though no faster than they had done in the second half of 1974/5; fixed investment was declining. This decline was most marked in non-residential construction where the level of spending continued to fall throughout 1975/6 and reached its lowest level since 1967.

Following the December election, the incoming Government introduced substantial taxation concessions to encourage early new investment in plant and equipment. These incentives were in addition to the double depreciation allowances which had been extended in the 1975/6 budget. The ability of firms to take advantage of these concessions would presumably be limited in cases where they were still operating well below existing capacity or were uncertain about the profitability of proposed investment; but investment in plant and equipment increased in the six months to June. Reflecting the higher spending on equipment, investment by manufacturing industry seems to have increased in the second half of 1975/6 by a little more than it fell in the previous six months. However the level of mining industry investment remained low throughout 1975/6 – at less than half the levels of the early 1970's. Investment in industries other than mining and manufacturing increased during much of 1975, but the momentum does not seem to have been sustained in the first half of 1976.

At about the time of the strengthening of business spending on fixed capital equipment in the second half of the year there was also a sharp turnaround in inventories. Involuntary accumulation of non-farm stocks had been substantial in the first half of 1974/5; the running down of excess stocks continued over four quarters, the total amount being equivalent to about 2 per cent of annual GDP. Non-farm inventories at the end of 1975 appeared to be much closer to desired levels and there was an increase in stocks during the March quarter.

There was a resurgence of private investment in new dwellings during 1975/6. Finance for housing reached record levels, although borrowers directed a higher than usual share of funds into the purchase of existing, rather than new, dwellings (see graph 10 on page 19). Even so, the number of dwelling commencements in the March quarter of 1976 was 33 per cent higher than it had been twelve months earlier; the increase was from a low level. For the year as a whole, spending on dwellings, measured in constant prices, was about 12 per cent higher than in 1974/5 adding about 0.5 percentage points to gross national expenditure.

Private consumption is the major spending component in overall activity. Real private consumption per head has remained virtually unchanged for a little over two years, when a high rate of household saving emerged as incomes rose very sharply. In the six months to March 1976 total wages, salaries and supplements were almost 50 per cent higher than in the same period of 1973/4. Cash benefits from the Government almost doubled so that, despite falling farm incomes, total household incomes rose by 43 per cent, or 42 per cent after tax. Out of these incomes, consumption rose by 39 per cent and saving increased by about 55 per cent. After allowing for price changes, the rise in consumption over the two-year period was only about 3 per cent in real terms, little more than the growth in population. Figures for retail sales suggest some quickening in private consumption in the last four months of 1975/6 but for the year as a whole the rise, in constant prices, was probably much the same as the 1.7 per cent achieved in 1974/5.

The most buoyant component of private consumption appears to have been household electrical goods; in the first three quarters of 1975/6, spending was over 30 per cent higher, in current prices, than in the previous corresponding period, influenced no doubt by the introduction of colour television. On the other hand, spending on clothing, drapery and footwear and on new motor vehicles, which in real terms had been much the same in 1974/5 as in 1973/4, actually declined in 1975/6; vehicle registrations, however, were recovering in the second half of 1975/6. Prices for clothing and vehicles rose rapidly in 1975/6.

Following the increase of 46 per cent in 1974/5, Australian Government budget outlays rose by 23 per cent in current prices in 1975/6. However, less than a quarter of outlays by the Australian Government involve direct expenditure on goods and services; the remainder consists of transfer payments and net advances to other levels of government, governmental authorities and the private sector. These latter kinds of outlays have grown fastest in recent years; for example, cash benefits to persons increased by over 40 per cent in both 1974/5 and 1975/6. The increase in 1975/6 reflected the introduction of Medibank and a much higher number of recipients of unemployment benefit. Grants and net advances to state and local governments, which finance a substantial proportion of spending on goods and services by these authorities, increased by 53 per cent in 1974/5 and 32 per cent in 1975/6.

14 Output, Employment & Labour Costs
HALF YEARLY PERCENTAGE CHANGE,
SEASONALLY ADJUSTED

Total spending on goods and services by all levels of government is estimated to have risen by about 3 per cent in real terms in 1975/6, compared with 8 per cent in the previous year. After increasing very rapidly through 1974/5, growth slowed noticeably in the first half of 1975/6. The 1975/6 Budget foreshadowed a further slowing in the second half of the year; in the event, with restraints also from the new Government, spending by governments fell when measured in constant prices. The fall was mainly in direct spending on goods and services by the Australian Government but state and local governments also felt the effects of the pressures to contain the level of spending.

Demand for Australian non-farm exports declined in the first half of 1975/6 but then increased. Demand for farm exports was higher, reflecting, in the main, recovery in demand for meat and wool from the depressed levels of the previous year.

Supplies

Aggregate supplies had to adjust to a sharp reduction in final demand during 1974/5; imports fell particularly sharply after September 1974 and domestic production was reduced as excessive inventories were worked off. This adjustment was largely completed in the first half of 1975/6 and domestic output began to rise again in the second half although, with final demand sluggish and imports rising firmly, there was little need for a rapid expansion of output. In the event, gross domestic product, measured in constant prices, was about 2 per cent higher than in 1974/5.

Non-farm product, which had declined by 1.8 per cent (in constant prices) in 1974/5, appears to have regained its 1973/4 level. The first three quarters of 1975/6 saw a fairly consistent rise in industrial production (as measured by the A.N.Z. Bank index) at an annual rate of about 10 per cent; however, the upward trend was checked in the final quarter of 1975/6 and, at year end, the index had still not recovered all the ground lost over the fifteen months to June 1975. Chemicals, and to a lesser extent textiles, were groups recording strong rises in 1975/6. Production of transport equipment, building materials and metals and machinery grew at best more slowly; all groups remained below previous peak levels.

In 1974/5 greater mineral production had provided some offset to declining industrial production. The reverse occurred in 1975/6, particularly in the first half when, as industrial production in Australia turned up, mineral production moved down. Reduced Japanese demand for coal and iron ore were major factors; production of most non-ferrous metals also declined in 1975/6. Production of crude oil has been fairly stable since 1973/4 but production of natural gas has increased.

The aggregate volume of farm production increased strongly in 1974/5 and surpassed the previous best year, 1971/2; in the year just ended, a further strong advance occurred. The increase in 1975/6 came mainly from some further recovery in the production of meat for export but production in this industry remained well below potential with cattle producers heavily overstocked. At the end of the year, dry conditions in some areas were causing increasing concern that there might be reduced output, especially of crops, in the coming season.

Labour Market

Unemployment remained at a high level throughout 1975/6. As in the early phase of other upswings, the emergence of any appreciable increase in employment opportunities appeared to be lagging behind the indications towards the end of the year of some recovery in private spending.

Following a fall of 4 per cent over 1974/5, private employment fell a further 0.7 per cent in the first half of 1975/6. Government employment, which had expanded by 8 per cent in 1974/5, mainly under the influence of the Regional Employment Development Scheme and other employment-creating measures, began to fall in the half-year to December 1975 as these schemes were phased out.

Consequently, total employment fell by close to 1 per cent in the half-year. Rises in aggregate employment were recorded in some months of the second half of 1975/6 as government employment stabilised and private employment showed some tentative signs of recovery.

Unemployment rose from 1.5 per cent to 4.5 per cent of the estimated work force during 1974/5; it was 4.9 per cent at the end of 1975/6. Aggregate seasonally adjusted statistics suggest a continued increase in the first four months of 1975/6, followed in the summer months by some fall, which was for the most part reversed in the final months of the year. However, these movements were difficult to correlate with other indicators; subsequently published statistics showed little change (seasonally adjusted) in civilian employment over the summer months. The apparently inconsistent patterns suggested by these two series reflect problems of seasonally adjusting statistics at unusually high levels of unemployment, as well as the usual tendency for many to drop out of the work force when jobs are difficult to obtain, and perhaps, some effects of widely publicised changes in the administration of the payment of unemployment benefits.

It is clear, however, that unemployment remained high throughout 1975/6; all States had high unemployment rates, with New South Wales, Queensland and Tasmania the worst affected. The rate was higher among juniors than among adults, and also in unskilled and semi-skilled occupations; the recent tendency for minimum wages to rise more rapidly than average wages could have further reduced job opportunities for less skilled job seekers.

Incomes

In 1975/6, gross domestic product, at current prices, appears to have been about 17 per cent higher than in 1974/5, but much of the rise reflected price increases; the implied deflator for GDP may have increased by about 14 per cent, compared with 17.5 per cent in the previous year.

Money wages rose less in 1975/6 than in the previous year. From a peak in mid 1974, the growth of average earnings decelerated through 1974/5; some of this slowing reflected reductions in overtime payments but the rate of growth of standard wage rates had also declined prior to the introduction of wage indexation in May 1975. In accordance with the guidelines it announced in April 1975, the Arbitration Commission used movements in the consumer price index as a basis for granting increases in award wages in September 1975 and February and May 1976 of 3.5, 6.4 and 3.0 per cent respectively. However, in the May decision the full percentage increase applied only up to the level of average minimum award rates; those with award wages above $125 per week received a flat increase of $3.80, so that the decision would have added little more than 2 per cent to average earnings. Largely reflecting the increases granted by the Commission during the year, average minimum award wage rates in June 1976 were estimated to be about 15 per cent higher than twelve months earlier and average weekly earnings per employed male unit probably increased by around 14 per cent over this period. These movements went far towards maintaining the sharply increased levels of real wages that had emerged during 1973 and 1974. With the introduction of equal pay largely completed, wages for females rose at much the same rate as for males in 1975/6; over the previous two years average minimum award wage rates for females had risen 78 per cent compared with 54 per cent for males.

15 Selected Ratios to GDP
(SEASONALLY ADJUSTED)

With employment changing little during 1975/6, total wage incomes grew at about the same pace as average wages and, for the year as a whole, were about 14 per cent higher than in 1974/5. With increased benefits under Medibank, higher rates of pension and unemployment benefit, and a higher average number unemployed, government cash benefits to persons were around 40 per cent higher than in 1974/5 and contributed strongly to the growth of aggregate household incomes.

Despite an increase in the second half of the year, apparent output per worker in Australia has barely regained the levels achieved in the first half of 1973/4. Given the rapid increases in earnings described above, prices have, of course, risen rapidly although somewhat less than earnings. Over the recent period of inflation therefore, much of the rise in wages has been at the expense of other sectors, particularly corporate trading enterprises and, to a lesser extent, farmers (see graph 15)

The gross operating surplus of companies fell sharply in current dollar terms from the end of 1973. With a deceleration in wage increases there was some recovery in profits in the final quarter of 1974/5, but the rate of increase has not been maintained. The impact of the introduction of Medibank on the consumer price index gave, through wage indexation, some temporary respite from the growth of wage costs; however, this was later substantially offset by the impact of increases in public sector charges. The increase in the consumer price index in the September and December quarters was carried through to an increase in award wages of 6.4 per cent in February. To the extent that price increases are being passed into wages, prospects for a recovery in profitability depend heavily on a strong recovery in productivity, and there is little to indicate that this is taking place; the apparent increase in the second half of 1975/6 did little more than offset the fall in the first half. While some cyclical recovery in productivity is expected in 1976/7, prospects for longer term productivity growth are being affected by the failure to upgrade the capital stock in the face of uncertainty about future demand and profit prospects.

The farm sector, whose products have a substantial export component, is unable fully to pass on increases in costs. Consequently despite the generally high prices for many products in the last two years, aggregate farm incomes in real terms have remained below those in most years of the last decade, despite the sector's particularly impressive long term increases in productivity. In 1975/6 lack of overseas markets for meat continued to constrict both productivity and incomes in this industry. Part of the effect on incomes of an improving wool market was delayed by strikes, and sugar prices were down from the high levels of 1974/5. Nevertheless, the gross value of rural production and the realised income of unincorporated farm enterprises showed moderate increases in 1975/6; in real terms aggregate farm income would have been lower than in 1974/5 and about half that in the peak year of 1973/4.

Aggregate income of other unincorporated enterprises, which in 1974/5 increased by less than the rise in prices, seems to have risen firmly in 1975/6. Of course not all groups would have done well; presumably difficulties would have continued in industries in which labour costs are a high proportion of total costs, and for those relying on dividend and interest income from financial capital that is fixed in money terms.

The gross operating surplus of public trading enterprises increased sharply in 1975/6, due mainly to higher charges for postal and telecommunication services. Tax revenues are of course a much more important source of income for the public sector. Collections of all personal income taxes increased by 20 per cent in 1975/6; the relatively small size of the increase was a factor in the ability of wage earners to maintain much of the increase in the overall share of real (after tax) income that they had achieved in 1973/4 and 1974/5. With profits low in 1974/5 and a reduction in tax rates, company income tax collections rose only 7 per cent in 1975/6. Following the substantial increases announced last August, major indirect taxes yielded the Australian Government 28 per cent more than in 1974/5; with less rapid growth in collections by state and local governments, the rise in total indirect taxes paid to governments was about 26 per cent.

Prices

Prices have continued to increase rapidly. With fluctuations from quarter to quarter, the consumer price index has increased at an underlying annual rate of close to 15 per cent over the last three years. The upward movement appeared to be a little faster than this in the middle quarters of 1974; although it has subsequently been lower, it is not yet clear whether deceleration in price increases will continue. To some extent, the absence of a clear trend in the rate of change of the index reflects divergent contributions from the food and non-food items. Much of the growth in prices in 1973 reflected the impact on food prices in Australia of strong world demand for meat; the fall in meat prices in 1974/5 produced a slowdown in the growth of food prices. These movements provided some offset to the course of non-food prices, in which trends for acceleration and deceleration in prices tend to be more apparent. The acceleration in non-food price increases up to the first half of 1974/5 and the subsequent deceleration broadly reflected the movement in labour costs (see graph 14), modified to some extent by movement in the prices of exports and imports.

16 Prices
HALF YEARLY PERCENTAGE CHANGE,
SEASONALLY ADJUSTED

In a country like Australia, changes in the prices of internationally-traded goods can have an important influence on the course of prices and money incomes. They can also affect real incomes. An improvement in the external terms of trade through a rise in export prices tends to add more to local incomes than to costs. Conversely, a deterioration in the external terms of trade through a rise in import prices usually adds to domestic cost pressures. These effects may be seen from the movements in export prices and import prices over recent years shown on graph 5 on page 11. Despite the impact of high world prices on the Australian price for meat, the very strong rise in overall prices received for Australian production in 1972/3 (as measured by the implicit price deflator for gross national product) exceeded the rise in the prices paid by Australians for the goods and services they purchased (as measured by the implicit price deflator for gross national expenditure – see graph 16 on this page). In 1974/5, the rise in import prices substantially outstripped the increase in prices for exports and, at a time when unit labour costs were rising strongly, added further to pressures on domestic costs and prices. In the first half of 1975/6, the slowing of growth in export prices was substantially matched by a slower rate of increase in import prices; over the year as a whole, there appeared to be little change in the external terms of trade.

Much of the fluctuation in the rate of growth of aggregate indicators of consumer prices during 1975/6 reflected the uneven impact in time of government taxes, charges and subsidies, etc.; excluding these, the consumer price index increased by around 3 per cent per quarter throughout the year. The government taxes and charges had both direct and indirect effects. The index-related 6.4 per cent increase in award wages in February was followed by sharp increases in many prices, of which those for steel and building materials were (in part because of data availability) the most noticeable. In the three months from February prices of building materials rose about 5 per cent compared with an increase of about 12 per cent in the previous twelve months. The impact of these increases on prices of final products which takes time to work through, was not so apparent in the consumer price index for the June quarter; a fall in seasonal food prices in March/April also helped moderate the index in that quarter. At the end of 1975/6, the consumer price index was 12.3 per cent higher than it was twelve months earlier; for the food and non-food components the rises were 10.5 and 13.1 per cent respectively.