Författare: Peter Martin Visiting Fellow Crawford School of Public Polic

Opposition leader Peter Dutton might have been hoping for an endorsement from economists for his plan to take Australian nuclear.

He shouldn’t expect one from The Economist.

The Economist is a British weekly news magazine that has reported on economic thinking and served as a place for economists to exchange views since 1843.

By chance, just three days after Dutton announced plans for seven nuclear reactors he said would usher in a new era of economic prosperity for Australia, The Economist produced a special issue, titled Dawn of the Solar Age.

The June 22 2024 solar special issue.

Whereas nuclear power is barely growing, and is shrinking as a proportion of global power output, The Economist reported solar power is growing so quickly it is set to become the biggest source of electricity on the planet by the mid-2030s.

By the 2040s – within this next generation – it could be the world’s largest source of energy of any kind, overtaking fossil fuels like coal and oil.

Solar’s off-the-charts global growth

Installed solar capacity is doubling every three years, meaning it has grown tenfold in the past ten years. The Economist says the next tenfold increase will be the equivalent of multiplying the world’s entire fleet of nuclear reactors by eight, in less time than it usually takes to build one of them.

To give an idea of the standing start the industry has grown from, The Economist reports that in 2004 it took the world an entire year to install one gigawatt of solar capacity (about enough to power a small city). This year, that’s expected to happen every day.

Energy experts didn’t see it coming. The Economist includes a chart showing that every single forecast the International Energy Agency has made for the growth of the growth of solar since 2009 has been wrong. What the agency said would take 20 years happened in only six.

The forecasts closest to the mark were made by Greenpeace – “environmentalists poo-pooed for zealotry and economic illiteracy” – but even those forecasts turned out to be woefully short of what actually happened.

Installations for 2024 are an estimate.
The Economist, IEA, Energy Institute, BloombergNEF

And the cost of solar cells has been plunging in the way that costs usually do when emerging technologies become mainstream.

The Economist describes the process this way:

As the cumulative production of a manufactured good increases, costs go down. As costs go down, demand goes up. As demand goes up, production increases – and costs go down further.

Normally, this can’t continue. In earlier energy transitions – from wood to coal, coal to oil, and oil to gas – it became increasingly expensive to find fuel.

But the main ingredient in solar cells (apart from energy) is sand, for the silicon and the glass. This is not only the case in China, which makes the bulk of the world’s solar cells, but also in India, which is short of power, blessed by sun and sand, and which is manufacturing and installing solar cells at a prodigious rate.

Solar easy, batteries more difficult

Batteries are more difficult. They are needed to make solar useful after dark and they require so-called critical minerals such as lithium, nickel and cobalt (which Australia has in abundance).

But the efficiency of batteries is soaring and the price is plummeting, meaning that on one estimate the cost of a kilowatt-hour of battery storage has fallen by 99% over the past 30 years.

In the United States, plans are being drawn up to use batteries to transport solar energy as well as store it. Why build high-voltage transmission cables when you can use train carriages full of batteries to move power from the remote sunny places that collect it to the cities that need it?

Solar’s step change

The International Energy Agency is suddenly optimistic. Its latest assessment released in January says last year saw a “step change” in renewable power, driven by China’s adoption of solar. In 2023, China installed as much solar capacity as the entire world did in 2022.

The world is on track to install more renewable capacity over the next five years than has ever been installed over the past 100 years, something the agency says still won’t be enough to get to net-zero emissions by 2050.

That would need renewables capacity to triple over the next five years, instead of more than doubling.

Oxford University energy specialist Rupert Way has modelled a “fast transition” scenario, in which the costs of solar and other new technologies keep falling as they have been rather than as the International Energy Agency expects.

He finds that by 2060, solar will be by far the world’s biggest source of energy, exceeding wind and green hydrogen and leaving nuclear with an infinitesimally tiny role.

In Australia, solar is pushing down prices

Australia’s energy market operator says record generation from grid-scale renewables and rooftop solar is pushing down wholesale electricity prices.

South Australia and Tasmania are the states that rely on renewables the most. They are the two states with the lowest wholesale electricity prices outside Victoria, whose prices are very low because of its reliance on brown coal.

It is price – rather than the environment – that most interests The Economist. It says when the price of something gets low people use much, much more of it.

As energy gets really copious and all but free, it will be used for things we can’t even imagine today. The Economist said to bet against that is to bet against capitalism. Läs mer…

Australia’s top economic forecasters expect the Reserve Bank to start cutting interest rates by March next year, taking 0.35 points of its cash rate by June.

If passed on in full, the cut would take $125 off the monthly cost of servicing a $600,000 variable-rate mortgage, with more to come.

The panel of 29 forecasters assembled by The Conversation expects a further cut of 0.3 points by the end of 2025. This would take the cash rate down from the current 4.35% to 3.75% and produce a total cut in monthly payments on a $600,000 mortgage of $335.

The forecasts were produced after last week’s news of a higher than expected monthly consumers price index.

Several of those surveyed revised up their predictions for interest rates in the year ahead, while continuing to predict cuts by mid next year.

Only two expect higher rates by mid next year. Only four expect no change.

Now in its sixth year, The Conversation survey draws on the expertise of leading forecasters in 22 Australian universities, think tanks and financial institutions – among them economic modellers, former Treasury and Reserve Bank officials and a former member of the Reserve Bank board.

Eight of the 29 expect the first cut to come this year, by either November or December.

One of them is Luci Ellis, who was until recently assistant governor (economic) at the Reserve Bank and is now at Westpac. She and her team are forecasting three interest rate cuts by the middle of next year, taking the cash rate from 4.35% to 3.6%.

Reserve Bank a ‘reluctant hiker’

Ellis says inflation isn’t falling fast enough for the bank to be confident of being able to cut before November. But after that, even if inflation isn’t completely back within the bank’s target band but is merely moving towards it, a “forward-looking” board would want to start easing interest rates.

Another forecaster, Su-Lin Ong of RBC Capital Markets, says in her view the bank should hike at its next board meeting in August after the release of figures likely to show inflation is still too high. But she says the bank is a “reluctant hiker” and keen to keep unemployment low.

Although several panellists expect the Reserve Bank to hike rates in the months ahead, almost all expect rates to be lower in a year’s time than they are today.

The panel expects inflation to be back within the Reserve Bank’s 2-3% target band by June next year, and to be close to it (3.3%) by the end of this year.

Twelve of the panel expect inflation to climb further when the official figures are released at the end of this month, but none expect it to climb further beyond that. And all expect inflation to be lower by the end of the financial year than it is today.

One, Percy Allan, a former head of the NSW Treasury, cautions that the tax cuts and other government support measures due to start this month run the risk of boosting spending and falling progress on inflation.

The panel expects wages growth to fall from 4% to 3.5% over the year ahead, contributing to downward pressure on inflation, but to remain higher than prices growth, producing gains in so-called real wages.

It expects wages growth to moderate further, to 3.2%, in 2025-26.

Consumer spending is expected to remain unusually weak, growing by only 1.7% in real terms over the next 12 months, up from 1.3% in the latest national accounts.

Mala Raghavan, from the University of Tasmania, said even though inflation was falling, previous price rises meant the prices of essentials remained high. AMP chief economist Shane Oliver expected the boost from the Stage 3 tax cuts to be offset by the depressing effect of a weaker labour market.

Unemployment to climb modestly

The panel expects Australia’s unemployment rate to climb steadily from its present historically low 4% to 4.4%.

Moodys Analytics economist Harry Murphy Cruise said although the increase wasn’t big, the effect on pay packets would be bigger. Employers were shaving hours and easing back on hiring rather than letting go of workers.

Panellists expect China’s economic growth to slip from 5.3% to 5% and US growth to slip from 2.9% to 2.4%.

Australia’s economic growth is expected to climb from the present very low 1.1% to 1.3% by the end of this year and to 2% by the end of next year. Although none of the panel are forecasting a recession, most of those who offered an opinion said if there was a recession, it would start this year when the economy was weak.

Some said we might later discover that we have been in a recession if the very weak economic growth of 0.1% recorded in the March quarter is revised and turns negative when updated figures are released in September.

Home prices are expected to continue to climb notwithstanding economic weakness. Sydney prices are expected to increase a further 5% in the year ahead after climbing 7.4% in the year to May. Melbourne prices are expected to rise a further 2.8% after climbing 1.8% in the year to May.

Percy Allan said Sydney had fewer homes available than Melbourne, and Victoria’s decisions to extend land tax and boost rights for tenants had upset landlords, many of whom were offloading their holdings.

Home prices to climb further

Julie Toth, chief economist at property information firm PEXA, said rapid population growth was colliding with an ongoing decline in household size since COVID. At the same time, fewer new homes were being commissioned and long delays and high construction costs were also keeping supply tight.

The panel expects non-mining business investment to continue to climb in the year ahead, by 5.2%, down from 6.9%.

It expects the Australian share market to climb by a further 5.6%

Read the answers on PDF, download as XLS

The Conversation’s Economic Panel

Click on economist to see full profile. Läs mer…

Right now things feel awful.

Tuesday’s Westpac Melbourne Institute survey shows three times as many Australians say their finances have worsened than say they’ve got better, and twice as many think the economy is getting worse as think it is getting better.

The national accounts show real income per Australian (adjusted for inflation) has been sliding for a year.

We are buying less per person online and in shops than at any time in the past two and a half years.

And Commonwealth Bank transaction data shows even our spending on essentials is failing to keep pace, except for older (mostly unmortgaged) Australians who are actually spending more on essentials than they were, as well as more on luxuries.

But – and I am sure you’ll find this hard to believe – things are nowhere near as bad right now, in the middle of 2024, as they were expected to be.

Nowhere near as bad as predicted

A year ago, at the start of the financial year that’s about to end, the panel of expert forecasters assembled by The Conversation expected inflation and interest rates to be much higher than they are today.

Inflation was going to be 3.9%, not the present 3.6% and headed down, and the Reserve Bank’s cash rate was going to climb two times in the second half of 2023 from 4.1% to 4.5%. Instead it climbed once, to 4.35%, and hasn’t climbed since.

That’s something worth remembering when people tell you inflation is stubbornly high. It isn’t as stubbornly high as it was expected to be.

Economists pencilled in a 42% chance of recession.
MikeShots/Shutterstock

And a recession looks much less likely.

Back in mid-2023, when asked about the probability of a recession in the next two years, the expert panel’s average answer was 42%.

Asked when that recession was most likely to start, the panel’s average answer was December 2023.

So worried was the government over Christmas that it asked the treasury to come up with extra cost of living relief. What the treasury produced was a reworking of the Stage 3 cuts due to start in July.

The rejig doubled the tax cut set to go to Australians on average earnings and halved the tax cut set to go to Australians on more than A$200,000.

By the time The Conversation’s panel next assembled to examine the probability of a recession, in February, it had cut the likelihood to 20%, which is about the lowest average probability a recession ever gets in these sorts of surveys.

What’s gone right

What’s gone right is that inflation has proved easier to subdue than expected, and not only inflation in the price of goods, many of which are made overseas. Inflation in the price of services has been falling the entire financial year.

That good news has allowed the Reserve Bank to hold off on increasing interest rates all year. And it’s partly because of us.

Businesses attending the bank’s liaison meetings have told it they are “intensifying their focus on containing costs as they find it harder to increase prices”.

That’s because we are less likely to put up with higher prices. We have become “budget conscious” making it more difficult for firms to pass on cost increases.

So instead, firms are cutting costs. Examples include

reviewing staffing structures, converting contractors or casuals to permanent staff, changing working or opening hours, and considering offshoring.

And they are becoming less likely to offer pay rises, planning for slower wage growth in the year ahead.

All of this is bearing down on inflation.

Australia’s relatively-new monthly consumer price index is likely to show an increase when it is released on Wednesday. The annual rate of inflation might climb from 3.6% in April to 3.8% or even 4% in May.

Those are the headline AMP and Westpac forecasts. But they hide what the AMP and Westpac expect to happen beneath the surface.

The AMP expects prices to fall in the month of May, by 0.2%. Westpac expects no change, meaning a monthly inflation rate of zero.

The annual inflation rate is expected to climb because prices fell a year earlier in May 2023, not because they climbed in May 2024.

Lower inflation, and a tax cut

If the inflation rate does keep sinking when the official quarterly figures are released next month, it’ll be doubly good news for stretched households. It’ll mean slower price rises, and probably an end to talk of further interest rate rises.

Along with the Stage 3 tax cuts legislated by then treasurer Scott Morrison way back in 2018 and due to hit pay packets in an amended form next week, they are set to make us feel better about the future; perhaps better than we’ve felt in years.

The long-delayed tax cuts, which turn out to be timely in a way Morrison couldn’t have antipated, are worth about $2,200 per year for the average household according to calculations being circulated by Treasurer Jim Chalmers.

That’s $84 per fortnight, after tax. For a couple with two children, it’s almost $4,000, which is $150 per fortnight.

As bleak as it was, this month’s consumer survey recorded a slight uptick in confidence, of 1.7%.

On Monday The Conversation will publish the experts’ forecasts for the financial year that’s about to begin. It’s a fair bet they’ll be brighter than those for the financial year about to end. Läs mer…

There’s something curious about the proposed merger between Chemist Warehouse and Sigma Healthcare.

Chemist Warehouse has about 550
retail pharmacies. Sigma has another 400.

Yet the law limits owners to just a handful of pharmacies per state. Queensland, New South Wales and Victoria allow just five, Western Australia and Tasmania allow four, and South Australia allows six.

The two families that control Chemist Warehouse initially enlisted spouses and cousins to run individual outlets. Once they ran out of relatives who were registered pharmacists and eligible to own pharmacies, they signed up franchisees using contracts that appear to give their head office a fair amount of control.

The Australian Competition and Consumer Commission describes its influence over its franchised stores as “likely particularly strong”.

Large conglomerates

If you don’t see that many Chemist Warehouse stores as you walk around each day, and you see even fewer Sigma, that could be because of the different storefront names they use, such as MyChemist, Amcal, Discount Drug Store and PharmaSave.

Amcal would be part of the merger.
NilsVersemann/Shutterstock

Chemist Warehouse isn’t even Australia’s biggest pharmacy group. That’s EBOS, which runs brands including Terry White, healthSAVE, Cincotta Discount Chemist, Mega Save Chemist, Max Value Pharmacy, BetterBuy Pharmacy, MyMedical Pharmacy and Good Price Pharmacy Warehouse.

And true competition is even harder to find than the presence of these conglomerates suggests.

What matters for genuine competition is who owns the chemists nearby.

When an independent inquiry examined pharmacy remuneration and regulation in 2017 it found instance after instance of all of the pharmacies in a town being owned by the same group, even where the branding was different and they seemed to be competing.

In Alice Springs all four were owned by the same group; in Karratha both were; in Broome the proportion was three out of the four.

“We turned up to the first and said we were going to the next one afterwards,” the inquiry’s chair Stephen King said at the time. “They said: Why are you doing that? We own that one as well.”

‘Location rules’ keep out competition

Stores owned by a single owner are unlikely to compete on service, hours or price.

And bizarrely complicated location rules agreed to by the government and the Pharmacy Guild of Australia make it all but impossible for a new owner to come into a suburb or town and seriously compete.

It’d be taking a risk to summarise the rules (the handbook runs to 62 pages) but they broadly prevent a pharmacy that wants to fill prescriptions from setting up within 200 metres, 1.5 kilometres or 10 kilometres of an existing pharmacy, depending on whether it’s in a shopping centre, suburb or town.

If a competitor can’t come in and all the pharmacies in a particular location don’t compete, there’s little reason to expect them to discount. And most don’t, even though for the past eight years they have been able to.

Discounts rare

Back when King produced his report and the government paid pharmacies an average of A$11.50 per prescription, King’s team reckoned their actual average dispensing costs were lower, for some as low as $7 per prescription.

So the health minister Sussan Ley allowed pharmacies to discount, passing on some of the fat to their customers, but only up to $1 per prescription.

Chemist Warehouse pharmacies discounted by the full dollar. Few others did.

(In New Zealand, where unlimited discounts are allowed, and the legislated payment per patient was NZ$5, Chemist Warehouse discounted prescriptions by the full $5, offering customers prescriptions for free.)

The Pharmacy Guild was unhappy about the right to discount and lobbied the government to phase it out, something it did in this year’s May budget.

Ripe for an ‘Uber’ moment

The peculiar rules governing pharmacies ought to make them particularly profitable, except that they don’t, because pharmacies cost so much to buy. The benefit is baked into the price. King calls it the “taxi licence” phenomenon. The owners who sell get rich as a result of the rules, not the owners who buy.

Which gives new owners an even greater incentive to keep startups out.

Australia produces 1,400 pharmacy graduates a year. Many would like to own pharmacies and to offer discounts. Most will never get the chance. They are wage slaves, and they want the rules changed.

That’s how it was for years with taxis. The price of rides was high and the service was limited because of rules that choked competition. Until Uber.

All that needs to happen for pharmacies to face their own Uber moment is a change in the rules to allow unlimited discounting. The government could do it now if it wasn’t worried about a backlash from existing owners.

All it would take would be one registered pharmacy developing a really good interface with near-instant delivery.

Machines can dispense medicines

Dispensing machine in the Netherlands.
OliverDelahaye/Shutterstock

A few years ago the Productivity Commission recommended the government move away from pharmacies as the vehicle for dispensing medicines and trial machines supervised by qualified staff.

They are ubiquitous in Canada. An Australian study found they work well within hospitals.

There would still be a role for pharmacists, but in primary health care, doing some of the work doctors now do.

The Australian Competition and Consumer Commission is wary about the proposed merger of Chemist Warehouse and Sigma Healthcare.

It says this is in part because they are also wholesalers and the combined group would have access to inside information on the pharmacists not in the group it supplied medicines to. It’ll decide by September.

Other decisions will matter more for service and prices. They concern discounting and location rules, and they’ll involve taking on existing owners. Läs mer…

If you are anything like me, the nearer you get to a deadline, the more desperately you want to postpone it, no matter how much harder that makes things down the track.

It’s what the Coalition wants Australia to do about its 2030 emissions reduction target – the one signed into law in 2022 and registered with the United Nations Framework Convention on Climate Change.

The Coalition says it remains “fully committed” to the more challenging target of net zero by 2050, but it wants to postpone some of the work needed to achieve it until later, nearer 2050.

It’s a human impulse that until the 1980s had economists baffled. That’s when they came up with a new name for it: “hyperbolic discounting”.

Most of us put things off

Before then, economists had no problem explaining people putting things off. We’d long had the concept of a “discount rate” to explain why we do it.

If I offered you a choice of finishing an unpleasant task this month in return for $100, or finishing it a year later for 5% less, you are pretty likely to opt for finishing it a year later in return for 5% less.

Economists would say that meant your “discount rate” (the rate at which you discount what happens in the future) was greater than 5% per year.

It’s an incredibly useful concept, and one of the reasons we want to be paid interest when we lend money or deposit money in a fixed-term account.

Yes, it will be nice to get our money back – but getting it back when the loan ends won’t feel as good as having it now. If our discount rate is 5% per year, getting the full amount back then will be worth 5% less to us per year, so we will want interest of 5% per year.

Voters and politicians discount the future

It’s also how governments and businesses decide whether to fund major projects. If their discount rates are 5% (they are usually higher) and the eventual payoff from the project works out at less than 5% per year, it isn’t worth it. As a species, we are more concerned about what happens now than what happens in the future.

At least that’s what was taught at universities in 1970s: everyone has their own personal discount rate. For patient people it is low, and for impatient people it is higher. If you can find out what it is, you can find out what they should do.

Except that many of us don’t behave like that at all. We appear to have a discount rate, but it changes – dramatically – the closer we get to a deadline.

Near deadlines, our behaviour becomes extreme

Remember when I asked about finishing an unpleasant task this month or a year later? You might well have given an answer that implied a discount rate near 5%.

You would have probably given a similar answer if I asked about finishing the task a year after that, in 2027 instead of 2026. Your discount rate would be near 5%.

Except for the week before the task is due. In that week, you might well be prepared to sacrifice almost anything – an awful lot – to put it off for another week or another month, or two months or a year. Your discount rate would be off the charts.

On a chart, it wouldn’t look like a straight line – 5% or so per year – it would like a hyperbola, a line that had suddenly climbed enormously high. That has also been used to describe the concept of hyperbolic discounting.

Hyperbolic discounting is a relatively new concept.
Linaimages/Shutterstock

Acting like a hyperbolic discounter – pushing out a deadline as it becomes imminent, even if it costs more to meet it later – as the Coalition now says it will do the 2030 emissions reduction target, is a way to never meet a deadline.

Of course, the Coalition says it won’t cost more to meet the final deadline of net-zero by 2050 because by then we will have nuclear power.

It’s a familiar argument to those of us who want to put things off. Something will come along that will make them easier to do later. If it doesn’t, maybe we will behave like a hyperbolic discounter again. Not that we expect to.

Nuclear power mightn’t make future choices easier

Except that the unexpected happens. Cost overruns are notorious in building nuclear power plants, even in countries that have lots of them and they are often delivered late.

And electricity is responsible for only one-third of Australia’s greenhouse gas emissions. Cutting electricity emissions to zero (a road we are already on, they’ve been falling since 2015) will leave another two-thirds of emissions untouched.

That’s unless we rapidly electrify other sources of emissions such as cars and trucks and the use of gas for heating, a transition the Coalition remains reluctant to embrace.

It’s hard to meet deadlines. Right now the government is on track to miss its 2030 emissions target of 43% below 2005 levels, although its officials say it is on track for 42% and it thinks it can make up the difference.

It’s tempting to put things off. If the Coalition persuades us, it’s because we are highly persuadable. Most of us don’t like hard choices now. We like them later. Läs mer…