Recovery? The forgotten factor

Weak income growth is threatening Australia’s recovery.

You have Ken Henry’s word for that.

The Treasury Secretary made himself absolutely clear on that point, in a speech he gave to business leaders in Brisbane yesterday.

“A key risk to the timing and speed of a recovery in private demand is the near term weakness in income growth,” Mr Henry said.

He warned that this is often overlooked.

It is, he said, “something that is not often given the same degree of attention as real economy developments.”

Mr Henry, though, was not suggesting that the business people present go back to their factories and offices and give their employees  big pay rises.

The problem, as he sees it, is more basic.

“Income growth is expected to be very weak in 2009-10,” Mr Henry said.

He said corporate profits would decline and family income growth would be subdued.

Why?

“This largely reflects significant price falls for Australia’s non-rural commodity exports,” Mr Henry said.

That, in turn, had driven a decline of more than 15 per cent in Australia’s terms of trade.

Mr Henry said Australia’s recovery would also depend on the pace of global recovery.

And he warned against the premature withdrawal of government stimulus measures, either in Australia or overseas.

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