It’s the economy, Joe.

Here’s why the federal government will change in 2016.

wages growth

Today, data was released showing negative wages growth for the first time in six years.

The last negative quarter was September 2009. The March quarter of 2015 takes us back to those bad days.

In an environment of negative wages growth, people feel stressed and unhapppy. Jobs are being lost.  Negative feelings about the economy inevitably hurt governments.

It’s the economy, stupid! 

… is a classic of modern political communication for a reason. Governments get thrown out when times are bad.

What Joe Hockey and Tony Abbott need to do is buttress the economy during the time when mining investment is falling. They ought not be stressing about surpluses – there are far less abstract and more concrete things in the economy that need their attention.

If the government spends more (in the right ways) it can keep people in work. This is important not just for their current well-being but their long-term prospects. People who spend time unemployed lose human capital. This permanently reduces their potential and the potential of the national economy.

The most recent Budget is probably not succeeding in pushing the economy forward and keeping people in work. The next Budget will be a pre-election Budget, so it will likely spend up big and reverse the mistakes this government has made. But will it be too late? The mid-year economic and fiscal outlook is also an opportunity to change course.

Another opportunity to change course will present itself if the Treasurer and Prime Minister are changed. It’s not impossible – a poll today is showing that the coalition’s recent recovery is ebbing, with the balance back to 47-53.

Will India save us from the decline of China?

This chart in the RBA’s chart pack today made me smile.

RBA chartpack china india

The Indian economy has been able to accelerate its growth rate over the last three years to the point where it is now above Chinese growth. This is a good result for Manmohan Singh and his successor Narendra Modhi. It will transform the lives of millions of Indians. They’ll gain opportunity they never before had.

But I want to look at this from Australia’s perspective. Chinese growth has been essential to our economic health. The extra economic activity it added each year forced the Australian economy to expand too. But now its growth is shrinking. Will we see Indian growth take up the slack?

Here’s how much extra GDP the two giants add when they both grow at seven percent.

Screen Shot 2015-05-06 at 12.09.06 pm

They don’t compare. China is far more valuable.

The reason is a bigger economy. China has more people and they are far richer. All those years of ten percent growth mean China’s economy is now worth over $9 trillion US dollars a year. India’s economy is worth less than $2 trillion a year.

So we ought to be cautious about anybody hyping the new economic miracle of India.

1. India will soon be the new China.

2. India: the Bullish case

3. Asia’s next big story

The two economies’ contribution to global growth, and their capacity to boost Australia, would equal out only if China’s growth slumped to two percent, and India’s rose to ten percent.

china 2 india 10Even if this amazing scenario happened, with China stuck in the doldrums and India roaring ahead, it would still take two decades for India to become a bigger economy than China.

India in red, China in blue
India in red, China in blue

We should cheer Indian economic growth, of course. It is not a country where poverty is relative and middle-class concerns about the prioritisation of material lifestyles apply. Indian growth will eliminate misery.

But it will not single-handedly save Australia. Relying on India for the sort of lift China gave us over the past decade is a recipe for disappointment.