Reserve Bank flags a low investment future as we concentrate our way to stagnation

To the extent we didn’t know it before, the Reserve Bank (RBA) has confirmed that our economic future looks bleak indeed until well into the 2020s.

The bank put together three scenarios for the economy in Friday’s August Statement of Monetary Policy, which is now our most up-to-date official view of the economy — the government’s July economic update having been, through no fault of Josh Frydenberg, comprehensively trashed by events in Victoria.

Even the RBA’s “baseline” scenario, seen as most likely, paints a miserable few years for Australians. The Great Morrison Stagnation that was the world pre-COVID will seem like nirvana in 2021 and 2022. And we still don’t really know how the recovery will play out — the RBA admits (as it has done for a while now) that it is very difficult, if not impossible, to be confident about key economic estimates more than three months into the immediate future. Nevertheless.

“It is expected that there will be ample spare capacity in the labour market over the next few years, with broader measures of labour market underutilisation remaining elevated,” the RBA says. “Consumption is not expected to reach its pre-COVID-19 level until early 2022 … household income is expected to decline over coming quarters as government support is tapered.”

The RBA is also pessimistic about business investment other than mining. It expects it won’t start recovering until after household consumption has picked up again.

“The timing and pace of the recovery in non-mining investment remains highly uncertain, but is expected to lag the recovery in consumption. This reflects the assumption that firms will first use up spare capacity as demand picks up, as well as the typical long lags in the planning and approval of construction projects. By the end of the forecast horizon, non-mining business investment is forecast to still be below its pre-pandemic level.”

That will be a key impediment to jobs growth, and will create a vicious circle in which households aren’t spending because of a lack of jobs growth, and businesses aren’t investing, and putting on more staff, because households aren’t spending.

That was the kind of rut we were stuck in before the pandemic: the 2018-19 budget forecast of non-mining investment growth of over 5% ended up at just 1.6%; a similar forecast in last year’s pre-election budget was drastically revised down to 2% in last year’s Mid-Year Economic and Fiscal Outlook, long before anyone had heard of COVID-19.

Getting businesses investing is thus a key challenge of the October budget. Business, of course, is insisting that reducing company tax, making it easier to cut wages, increasing the GST and deregulation will get them investing, and the government is sympathetic to that view.

Even if we accept those arguments from business (in the face of evidence), there are other impediments to investment and innovation that the government can control.

It’s now well-established that growing market concentration in the US over the last two decades has led to overly high profits (at least according to the organ of socialism, The Economist) and declines in business investment. Labor’s Andrew Leigh has long studied and written about the problem from an Australian perspective, where if anything we have a significantly more concentrated economy.

The current recession will exacerbate this problem. As smaller, more marginal businesses succumb to the recession, larger businesses survive and enjoy greater market share. Competition regulators and governments are more likely to approve mergers of failing businesses with successful competitors. That happens in every recession.

But the pandemic has also entrenched the power of big yech. Apple, Amazon, Facebook and Google have all unveiled results recently that show them essentially impervious to the historic contraction underway — or, in the case of Amazon, actually benefiting from it. These companies are now significantly larger than all but the biggest economies around the world.

That was before the Trump administration decided it wanted one of the big tech firms to compulsorily acquire TikTok, one of the few successful competitors to big tech’s dominance outside China.

The only way to address the problem of concentration undermining investment is an aggressive application of competition law that reduces concentration. Business hates that idea with a passion — witness the hostile reaction to the Turnbull government’s idea for divestment powers in energy regulation, something even Labor thought was outrageous.

But failing that, a low-competition, low-investment future beckons, with permanent implications for economic growth.