Financial Planning Industry – Global Trends

Australia’s headline inflation rate is the highest among the world’s largest advanced economies, prompting economists to warn the Reserve Bank may need to deliver further interest rate rises to quash persistent price pressures.

Australia’s consumer price index increased 5.4 per cent in the year to September 30, topping the list of headline inflation rates in the world’s 15 largest advanced economies, according to analysis by AFR Weekend.

The figures highlight the distinctive nature of Australia’s inflation outbreak, which started and peaked months after many other advanced economies, meaning price pressures have persisted well into 2023.

Sean Langcake, head of macroeconomic forecasting for Oxford Economics, said there was no single story explaining Australia’s higher inflation rate. While timing played a role in explaining why inflation was lower in Canada and the US, he said Australia seemed to have stronger underlying price pressures.

‘‘The thing that stands out is just the strength of our core CPI. I think we might be a little bit different on the breadth of inflation,’’ he said.

Australia’s underlying inflation, which strips out volatile price movements, was 5.2 per cent in the 12 months to September 30, exceeded by only Belgium and the United Kingdom.

National Australia Bank senior economist Taylor Nugent said a lot of the cross-country variation in headline inflation had been driven by exposure to the energy price shock resulting from Russia’s invasion of Ukraine.

‘‘Countries like the Netherlands and Spain saw very sharp increases in energy prices, but normalisation in prices is now weighing directly on headline inflation and more broadly easing cost pressures in the economy,’’ he said. ‘‘In Australia, energy prices have not risen as much, but have passed through to CPI more slowly because retail prices adjust infrequently. Government subsidies have pushed some of the measured impact out further into 2024, when subsidies unwind.’’

While core inflation peaked in Australia at a similar level to other countries, Mr Nugent said progress on taming price pressures had been harder to come by. ‘‘Domestic cost pressures are driving still-elevated services inflation. The September quarter data showed the RBA was overly optimistic on how quickly those domestic inflation pressures would recede, and their current forecasts imply only a very gradual easing. The RBA’s upgraded forecasts can readily justify some further tightening in policy.’’

Mr Langcake said population and rent growth may explain some of the relative strength in underlying price pressures. ‘‘Outside Canada, no one’s dealing with the same kind of net inward migration. If you think about housing markets, where supply can’t react [to demand], that’s where you’re getting more of an inflationary impulse.’’

Deutsche Bank chief economist Phil Odonaghoe said the figures demonstrated monetary policy had more work to do in Australia. ‘‘It is worth highlighting that many of the relevant peer economies in [the] sample have policy rates at or above 5 per cent – the US, UK, Canada, for example – while here in Australia, the cash rate is still below 4 1/2 per cent.

‘‘While Australia’s variable rate mortgage market helps explain why some of that gap to policy rates in peer economies might be able to persist, we don’t think variable rate mortgages can justify all of it.’’

Mr Odonaghoe said he expected the RBA would need to deliver one more rate rise, which would take the cash rate to 4.6 per cent.

While markets are almost certain the RBA will leave the cash rate on hold at 4.35 per cent in December, Mr Langcake said he expected the board would raise the cash rate. ‘‘I don’t think there’s any disagreement out there that inflation is coming down in year-on-year terms. The first part of the disinflation is the easy part. Now is where it gets trickier. There’s more upside risks than downside risks, and we could end up with inertia and persistence keeping us away from target for longer.’’

A further slowdown in global trade, the cost of the transition to net zero emissions and waning business dynamism could drive down productivity growth and make Australians poorer, the Reserve Bank has warned.

Echoing recent statements by former RBA governor Philip Lowe, economists at the central bank also said yesterday that Australia would not achieve the same high rates of income and productivity growth as previous decades without another round of ambitious economic reform.

The release of the research, Recent Trends in Australian Productivity, comes as the economy is hit by the largest fall in labour productivity on record, souring the outlook for inflation and incomes.

The decline has caused alarm among economists, given productivity improvements are the main driver of higher wages and living standards over the long run. Output per hour worked, a proxy for labour productivity, has fallen 6.5 per cent since its peak in March last year, pushing productivity down to March 2016 levels.

RBA economists Angelina Bruno, Jessica Dunphy and Fiona Georgiakakis pointed to a fading appetite for sweeping economic reform as one of several reasons for lacklustre rates of productivity growth over the past decade.

‘‘Without further economic and regulatory policy reforms, the same growth in productivity experienced in past reform decades is unlikely,’’ the trio said, citing research from the OECD showing elements of Australia’s regulatory landscape were excessively complex.

From the 1990s to the mid-2000s, productivity grew at an average rate of 2.1 per cent per annum, spurred on by deregulation, pro-competition policy reforms, and the uptake of new digital technologies, the RBA said.

That period included the Keating-era

‘‘However, the global nature of the productivity slowdown suggests economies must be dealing with common shocks, not only country-specific regulatory developments,’’ the economists said.

Productivity accounted for more than 80 per cent of national income growth over the past 30 years, according to the Productivity Commission.

A further slowdown in global trade, which the OECD said this week had declined by 2.5 per cent in the year to June, would also weigh on future productivity growth.

‘‘International trade increases competition, improves the reallocation of National Competition Policy, devised in response to Fred Hilmer’s sweeping review into competition in 1993.

Under the policy, states received about $600 million a year over a decade for implementing a host of important policies that limited anti-competitive behaviour and reformed the rules of the game for government-owned businesses.

Productivity growth in the decade before the pandemic was about 1.3 percentage points lower than the 1999 to 2004 period. The RBA found the finance, utilities, and manufacturing sectors recorded the biggest fall in productivity growth over this period. resources to more productive firms and reduces the costs of production by increasing the availability of intermediate inputs,’’ the RBA economists said.

Another key risk, they said, was the transition to net zero emissions.

‘‘Abatement measures will generally increase production costs for firms, weighing on productivity growth.

‘‘Over the longer term, as the benefits of these technologies are realised, the net impact on productivity may improve.’’

RBA governor Michele Bullock warned last month the sheer volume of investment required to meet Australia’s target of net zero by 2050 could push inflation higher over the medium term.

While the pandemic caused an unprecedented surge in the uptake of technology, including cloud computing and software enabling remote work, the RBA researchers said it was unclear whether businesses would face the same pressure to innovate now the health crisis is over.

Businesses where board members had relevant technological backgrounds were more likely to profitably adopt new technologies.

Income and assets Who counts as rich? ABS data holds the answer.

At what point does someone earn so much money, they can be described as rich? It’s one of the perennial debates in Australian politics, and it is poised to emerge again this year as Labor faces more questions over the future of the so-called stage three tax cuts.

The package includes an increase in the threshold for the top 45 per cent tax bracket from $180,000 to $200,000 (as well as a flat 30 per cent tax rate on all incomes between $45,000 and $200,000).

Proponents of stage three say it addresses bracket creep and improves the efficiency of the tax system, while opponents argue it overwhelmingly benefits high-income earners.

They also point to the significant hit to the budget: about $18 billion in the first year and $254 billion over 10 years.

Much of the debate has centred on whether someone who earns more than $180,000 is rich.

What is a ‘normal’ income in Australia? | The median Australian employee earned $65,000 in 2022, according to the Australian Bureau of Statistics.

Half of all employees earned less than this, while the other half earned more.

This figure captures both full-time and part-time workers. If we look at these groups separately, the data shows the median full-time worker earned $78,800 in 2022, while the median part-timer took home $32,400 last year.

Incomes have increased steadily over the past few decades amid growth in the Australian economy.

In 1975, the median employee earned $6448 a year. In the 47 years since then, wages have grown by about 5 per cent annually, taking median employee income to where it is today.

What about the top 1 per cent? | Each year the Australian Taxation Office publishes a breakdown of the taxable income distribution of workers.

It shows that in 2019-20, the most recent year for which data is available, the median taxpayer – the person at the 50th percentile – reported a taxable income between $60,326 and $61,264.

About half of all taxpayers earned less than this, while the other half earned more. If your taxable income was $131,501 or higher, then you earned more than 90 per cent of other Australians. If you earned more than $253,066, you took home more than 99 per cent of taxpayers.

About 5 per cent of taxpayers had incomes above $180,000.

The data, which covers the nation’s 11.39 million taxpayers, is presented in percentiles. For example, a person in the 10th percentile earns more than 10 per cent of workers, while a person in the 90th percentile earns more than 90 per cent of workers.

The data is also presented in the interactive table above.

What about gender? | The data also reveals the extent to which men dominate higher-paying jobs.

Of the 10 per cent of taxpayers who earned more than $131,501 in 2019-20, about 70 per cent were men. Women made up almost 60 per cent of the 20 per cent lowest income earners.

Which industries have the highest incomes? | Mining industry workers are Australia’s top earners, with the median employee in the sector taking home $54.90 an hour in 2022.

White-collar workers in the financial services and professional services industries were the next best-paid employees, earning about $50 an hour. Utilities workers and public servants rounded out the top five, with hourly rates just shy of $50.

Hospitality workers and retail workers earned the lowest salaries, recording median hourly rates of $25.80 and $28.80 an hour respectively.

How do the states compare? | The large differences between industry wages are a major driver of the income gaps we see between some states.

Residents of the ACT are the best-paid, with the median full-time worker earning a salary of $93,600 – thanks to the territory’s concentration of well-remunerated public sector workers. About 42 per cent of ACT workers are public sector employees, compared with 16 per cent nationally.

The next best-paid employees were in the Northern Territory, which also has a large public sector, and Western Australia, which is home to a well-paid mining-sector workforce. Tasmania is the poorest jurisdiction, with a median full-time salary of $70,200 – about $23,000 less than the ACT.

What’s a ‘normal’ amount of wealth? | While incomes are a key driver of financial comfort, wealth is arguably the more relevant measure of a person’s material wellbeing.

To get an idea of ‘‘normal’’ levels of wealth, we can look at annual estimates of household wealth, compiled by the ABS.

The data shows the median household had a net worth of $579,200 in 2019-20.

This figure captures the total value of assets such as real estate, shares and superannuation, and deducts a household’s liabilities such as credit card debt and home loans.

The data reveals huge differences between the wealthiest households and the poorest ones. In 2019-20, a household at the 90th percentile of the distribution – that is, a household that is richer than 90 per cent of households – had a net worth of $2.26 million.

A household at the 10th percentile was worth just $36,900, or 61 times less. How does Australia compare internationally? | While there are large disparities between the rich and the poor, Australia is still comfortably one of the world’s wealthiest countries.

Australian household incomes are the seventh-highest in the OECD – a club of mostly wealthy countries – while mean household net worth is third-highest, behind only the United States and Luxembourg.

The average household in the OECD has a yearly disposable income of $US30,490, compared with $US37,433 in Australia. Average household net wealth in the OECD sits at $US323,960, about $US200,000 below the wealth of the average Australian household.