Weekly economic briefing: It’s happening, Victoria

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

It’s happening, Victoria

A feature of Australia’s robust economic growth amongst developed countries is that it continues to be based on very strong population growth. While this has supported gains in economic welfare (including per capita gains), some of the spill-overs are issues such as congestion, infrastructure constraints, sustainability and the distribution of gains.

These challenges are seen across Australia’s capital cities, but as the city that’s been growing the fastest in recent years, Melbourne is at the forefront of these growing pains. Deloitte’s new Shaping Future Cities report, It’s Happening, Victoria, unpacks the idea that growth brings many opportunities but, also, many challenges.

Urban sprawl: A path no one wants

Most of Melbourne’s population growth over the last 20 years has been on the urban fringe, with more than 50% into the outer nine Local Government Areas (LGAs).

The alternative to urban sprawl is higher density, which is often maligned but can be good for liveability. In our report, we contrast the liveability of suburbs (a 15-factor index) to population density, and find that denser suburbs (such as Carlton, Prahran, Fitzroy, South Yarra) are some of Melbourne’s most liveable. In contrast, many lower density suburbs (such as Cranbourne East, Point Cook, Narre Warren) tend to score lower on liveability outcomes.

A tale of two cities? Why inclusive growth matters

As Melbourne continues to sprawl, distance from the inner city increasingly defines a socio-economic divide between the “haves” and “have-nots”. Distance matters, because the key services and amenities are more often located within inner city areas – and fringe households are increasingly excluded from key opportunities.

We estimate the gain to the Melbourne and Victorian economy from closing the unemployment gap (7% for the urban fringe in contrast to 5.9% for the rest of Melbourne, and one of the manifestations of disadvantage) at a $3.3 billion annual gain to Gross State Product (GSP). Importantly, that’s gains not only for the urban fringe, but also for the rest of Melbourne, and the rest of Victoria.

Divorcing growth from the car

The car is a reflection, and enabler of urban sprawl. It remains the dominant form of transport for both work commutes and leisure, and vastly more funding is dedicated to our roads than other transport modes.

Yet, as our cities grow, it is a relationship that arguably we need to break free from. Many of the ‘growing pains’ Melbourne, for example, faces – such as congestion, noise, parking and pollution – are in fact problems of car dependant growth, not growth as such.

In our report, we have modelled for a single trip, the total cost of driving compared to a train ride, and to cycling. As the diagram below shows, driving is 1.7 times more expensive than taking the train, and almost 19 times more expensive than cycling.

Growing pains – is regional Victoria the answer?

In addition to growing on the fringe and high density inner city development, regional cities are an area that Australia should increasingly focus on for growth.

We benchmarked the liveability of Victoria’s three largest regional cities of Geelong, Ballarat and Bendigo, against all 31 Melbourne LGAs. On aggregate, the three cities outperform Melbourne and its fringe on four of five key themes. Tellingly, if Geelong, Ballarat and Bendigo were treated as a Melbourne suburb – they would score in the top third of all suburbs across metropolitan Melbourne.

A growth model across the country which focuses more on regional cities, is one which might also deliver stronger gains to liveability.

For more information on the Australian brief, please contact co-authors David Rumbens and John Lee.

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

The squeeze on Middle America

  • Last week the team came across some remarkable data. The Oxford economist Max Roser estimates that in 1820 more than 90% of the world’s population lived in extreme, absolute poverty, defined as living on less than $2 per day in today’s money. By 1981 this had fallen to 44% of the world’s population. Today it stands at less than 10% of the world’s population.
  • On this admittedly low standard, world poverty has reduced by three-quarters in less than three decades, and against a background of a 67% rise in the world’s population. This is impressive. It took the UK a century, from the 1820s to the 1920s, to achieve the same degree of poverty reduction.
  • Yet averages conceal wide variations. In the last 40 years people in emerging economies, and the world’s richest people, have seen the fastest growth in income. By and large incomes for those on middle to lower wages in Western economies have grown more slowly.
  • Nowhere is this more apparent than in the US. There, strong growth – the US economy grew by 165% between 1980 and now – has been distributed unevenly across households and types of workers.
  • Median US household incomes – which include wages, investment income and welfare benefits – grew in real terms between the end of the Second World War to the late 1990s. Household incomes fell in the wake of the global financial crisis and it wasn’t until last year that they inched above where they were in 1999. So real incomes for a household in the middle of the distribution – the one that can reasonably claim to be typical of America – have scarcely risen in 18 years.
  • Richer households have done better. They hold financial assets, such as equities and pensions, which have done well in recent years. Such households also tend to have the skills and education which are at a premium in the labour market.
  • Things have been hard for lower income households. They have neither the assets nor the skills of those higher up the income scale. Technological change, globalisation and a growing premium on education have squeezed pay for unskilled workers. For someone without a high school diploma real hourly pay is a staggering 24% lower today than it was in 1979.
  • Gender offers another lens. For full time male workers median annual pay fell 3.0% last year to $52,146. After adjusting for inflation men earned more than that in 1973 – $55,317. So men on middle incomes have seen their pay stagnate over 45 years. For reasons which are not clear, men have also been withdrawing from the labour market, with male participation rates lower than at any time since records began in 1950. This has put an additional dampener on household incomes.
  • By contrast, women’s median earnings have risen since the sixties (although they remain lower than that of men). This has helped offset the pressure on households from weakness in the pay of middle, lower paid and less skilled male workers. Legal and social change has narrowed the gap between men and women’s pay and a shift in the structure of the economy has increased women’s role in the labour force.
  • The story of wage and income growth is nuanced, far more so than growth in GDP or average earnings might suggest. For some groups economic growth is not translating into personal prosperity. This not a new phenomenon; for those without a college degree, or middle income men, it predates the financial crisis by more than three decades.
  • In the nineteenth and twentieth centuries, American growth transformed the material condition of the mass of its population. From generation to generation, life got better. By 1940, 90% of 30-year-olds were earning more than their parents were at that age. It is a sobering thought that today just half of American 30-year-olds earn more than their parents did at the same age. For some, the up escalator of rising prosperity seems to have ground to a halt.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week up 2.5% at 7,476, after sterling fell towards the end of the week on Brexit-related uncertainty.

International economic briefing by Ian Stewart

Economics and business

  • The US announced a new 10% tariff on $200bn of Chinese imports, and threatened to increase this to 25% next year if no trade deal is reached
  • China announced it would retaliate by applying a tariff of up to 10% on an additional $60bn of imports from the US
  • China announced a series of pro-business policies in an attempt to retain foreign investor confidence in the wake of the US tariff statement
  • Global fund managers are more pessimistic about the world economy than at any time since 2011 according to a Bank of America survey
  • Euro area labour costs rose 2.2% in Q2, their fastest pace of growth in almost six years
  • The euro area job vacancy rate, the share of available jobs that are unfilled, reached 2.1% in Q2, its highest level on record
  • UK inflation rose unexpectedly to a six-month high of 2.7% in August, driven by increases in the prices of recreational goods, transport and clothing
  • UK retail investor confidence in the stock market fell to its lowest level since 1995, according to an index from broker Hargreaves Landsdowne
  • The OECD downgraded their forecasts for UK growth in 2018 from 1.4% to 1.3% in 2018 and from 1.3% to 1.2% in 2019
  • Apple paid €14.3bn in disputed taxes to Ireland two years after Brussels ruled that the company had violated EU law with its tax arrangements
  • India imposed restrictions on “non-essential” imports to reduce its growing external deficit and stabilise its falling currency
  • Turkey’s government announced it will cut public spending by $10bn annually to help tame runaway inflation and shore up the embattled lira
  • The Argentine economy contracted by 4.2% in Q2, its sharpest fall in four years, due to the currency crisis and a severe drought
  • Tesco opened two discount ‘Jack’s’ stores which will stock nearly 70% of own-branded British produce, in a bid to regain market share from discount retailers Lidl and Aldi

Brexit and European politics

  • EU27 leaders announced that the UK’s Chequers proposal contains “positive elements” but “will not work” at an EU summit in Salzburg
  • In response to the EU27 rejection, prime minister Theresa May, gave a televised statement calling for “a detailed explanation and counter proposals” from the EU
  • Theresa May also rejected the EU’s offer of an “improved” Irish backstop which would create a customs border between mainland Britain and Northern Ireland (NI)
  • Politico reports that the UK will call for Northern Ireland to remain in the EU’s regulatory area, as well as a “democratic anchor” to ensure that the province will not directly accept EU rules without any say
  • Theresa May confirmed that EU citizens living and working in the UK before Brexit will have their rights protected, irrespective of whether the withdrawal agreement is ratified.
  • The Migration Advisory Committee called for restrictions on post-Brexit unskilled migration but a lift on the existing cap for skilled EU migrants
  • Jaguar Land Rover put its factory workers on a three-day week until Christmas due to “a combination of Brexit and… the transition from diesel”
  • The IMF warned that a no-deal Brexit scenario would inflict “substantial costs for the UK economy, and to a lesser extent the EU economies.”
  • The FT reports that the EU will call for British inspectors to carry out checks on goods entering Northern Ireland from the UK, dropping previous proposals for a joint EU-UK service to do the checks

And finally…

  • Our excellent colleague in the economics team, Alex Cole, is leaving Deloitte this week. Alex has been with the team for over six years and between wrestling with all matters macro, he has been the mastermind behind the Briefing’s “And finally” pun. Many readers tell us that they like Alex’s pun so much they go to it first (we just hope they read the rest of the Briefing). Alex is irreplaceable, but that isn’t stopping us looking for a replacement. If you are interested, or know someone who might be, do take a look at the role summary here: https://bit.ly/2QNEpKM) – double whammy: Brexit and Alexit

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