By Joe Montero
A new financial year has just begun, and this is as good a time as any to consider the state of the Australian economy. The news we are getting from the official numbers is that it is looking good. Why? Because the official interest rate is down. The implication, it is suggested by some commentators, is that the rise in the cost of living is down.
If only it was all so simple. Inflation is calculated on the prices of a basket of goods. But the gap between what this basket represents, and the needs of households, is getting wider. This, the Consumer Price Index (CPI) is not a particularly accurate measure.
Put this aside, and the lower interest rate for now is the main driver of lower costs. This is not due to the workings of the economy. It has lowered because the Reserve Bank of Australia under political pressure has lowered or not raised it in recent times. Add that the impact of the Covid lock downs has passed.
Beneath this, the conditions of the underlying economy continue to operate. There is no significant change here. Good indicators of this is the lag in wage growth and rising unemployment. They suggest that the real economy is still in trouble. Consider these factors one at a time.
Wages rose by 0.9 percent in the last quarter. This continued a rise below the rate of inflation. This means the real wage rise, as opposed to the one on paper was less. If we factor ibn the underestimation caused by the way price rises are calculated, the reality is even worse.
The Reserve Bank’s own data back in May shows that at best wages, including the prediction to June, are treading water and nor rising above inflation, as can be seen in in this graph.
The jobs market has not improved. We know that jobs advertisements continued their downward trend in the earlier part of this year.
There is no reason to assume that this downward trend in jobs advertisements suddenly turned in the opposite direction over the last quarter. This is not out of step with the falling employment growth till June this year
Another important indicator is the fall in capital investment into the Australian economy, which means investment in assets to grow the economy. The graph below shows capital investment in all sectors except mining.
If the public share of capital investment in infrastructure is removed, leaving only that contributed by the private sector, the picture would be considerably bleaker than is shown in the graph.
There is the share of national income between wages and profit. Although there has been some movement in the shares of national income between wages and profits, this has been far from enough to appreciably shift the years of drift towards profit. Corporate profits sat at 27.3 in March 2025. This figure, however, is based on reported profits. Australian law allows corporations to understate real profits to avoid paying tax. Thus, the real share of profits is much higher than reported in official statistics. The recent decline can be attributed to less economic activity, which is indicated by the decline in capital investment.
Finally, Australia is impacted by the fortunes of the global economy, at a time when it is driven by worsening conditions in the United States and Europe. Australia’s ties with these economic centres ensures that immunity from their troubles and increasing uncertainty about the future, is impossible.
In summary, claims of an economic recovery are premature. Knowing the state of play is important to working out and applying solutions. The longer reality is ignored, the longer it will take to adopt the policies Australia needs to lift the economy in real terms.