• The GDP numbers have been disappointing over the past year;
• But that is a global phenomenon;
• Low productivity growth and a lack of household income growth are the biggest domestic worries;
• Greater use of fiscal policy is likely.
"Rack your brains, bite your nails
Nobody’s gonna love someone who fails
The pressure is on and so is the heat"
- Final Exam, Loudon Wainwright III
No prizes for guessing that Loudon Wainwright was an American musician. According to Wikipedia he was a folk singer who was called the ‘new Dylan’, not the only singer to be lumped with that tag. His main claim to fame for those of a certain generation is that he appeared in three episodes of M*A*S*H! The Wainwright words above ring loud and true when it comes to the performance of the economy. When the economy starts failing the unemployment rate goes north and business sales south. Politicians and central bankers start racking the brains for solutions before they feel the heat from grumpy households and businesses.
The most widely used measure of economic success is the GDP numbers. And those numbers have been disappointing. GDP has been growing at its slowest pace since the GFC. Even more stark is that GDP growth per capita (how much GDP has grown for the size of the population) is negative. Given the evident economic weakness it is no surprise that the unemployment rate (and the underutilisation rate) has risen over the past year.
But Australia is not an economic island (even if it is a geographic one). Weak economic growth is a world-wide phenomenon. And when measured against comparable countries, the performance of the Australian economy over the past year has not been too bad. With the exception of Denmark, the only countries that have recorded stronger economic growth has been the US, close neighbour Canada and three countries still recovering from the GFC (Spain, Greece and Portugal).
Annual % Change GDP
Annual Growth GDP Per Capita
(3 month average)
GDP Growth Selected OECD Countries
(year to June 2019)
One bit of good news is that over the past eighteen months national income growth has picked up, boosted by higher iron ore prices. This meant higher profits for iron ore miners and a higher tax take for the government. It has not led to higher wages growth. But with the Government rolling in money it helped pay for the income tax cuts. The RBA and Government are hoping the tax cuts will lead to a bump in household spending. Surveys suggest this is unlikely.
Financial markets doubt the rise in iron ore prices will last. Already, iron ore prices have fallen by 20% since early July. And at the time of writing financial markets expect that iron ore prices will fall by a further 30% over the next year. If this does occur it would likely constrain national income growth.
Nominal GDP Growth
(annual % change)
Australian Operating Budget Balance
(12 month rolling sum, $Ab)
Time To Buy A Major Household Item
(6 month average, difference from average)
Financial Market Outlook On Iron Ore Prices
(RMB per tonne)
The weakness of the Australian economy has been felt across all states. Growth of spending remains weakest in WA. But there has been a significant slowing in growth across the three Eastern States. The downturn in residential construction has played a big role. Not only does it directly impact the construction sector, but hurts parts of manufacturing (key suppliers to the building industry) as well as household-good retailors. Growth of sales at furniture stores in NSW are currently declining at their fastest pace since 2001.
One piece of good news is that the decline in house prices looks to have stabilized. And an increasing number of forecasters are looking for a (modest) rise in housing values over the next year, or two. Sentiment in the housing market has improved not only in Sydney and Melbourne, but also in some of the regions that have struggled over recent years (eg, some mining towns).
State Domestic Demand
(year to % change, two quarter average)
NSW Furniture Store Sales
(year to %, three month average)
Even in a weak economy some sectors do well. The good performance of the health and welfare sectors is underpinned by an aging population and the big boost in NDIS spending. The finalisation of big projects has boosted production in the gas industry. The desire of firms to digitise to raise productivity has helped the computer and telecommunication sectors.
But more sectors are finding the going tougher. The end of big mining projects and the downturn in residential building has hit the construction sector. And as noted that hits areas of manufacturing (and retailors). High prices has led to households and firms conserving their demand for electricity. The drought is making its unfortunate impact felt on parts of the agricultural sector.
(greater 5% growth over past year)
(negative growth over past year)
Oil and gas
Heavy engineering and construction
Computer system design and related services
Forestry and Fishing
Admin services (office admin, hiring companies, travel, home services)
Manufacturing machinery and equipment
Economic growth over the past year has been about trade and government
Two of the big drivers of the economy over the past year have been the government (health, NDIS, infrastructure) and trade (high iron ore prices, higher gas and iron ore volumes and weak import growth). In aggregate, the private sector has done it tougher. A lack of wages growth and high debt levels is making the consumer reluctant to spend. And after plenty of building over recent years, a downturn in residential construction was due. The uncertain economic outlook has weighed on firms’ Capex budgets.
It is not all bad news. There are signs that Capex Budgets will be bigger next year, notably for miners. The infrastructure boom means parts of the private sector need to boost their spending. High energy prices is encouraging investment into alternative sources. Tax cuts mean consumer disposable income growth will be faster. Sluggish price rises means worker pay packets go further.
In any event, household spending and business investment (the mining boom) has been the key drivers of the Australian economy for the past couple of decades. At some point in time growth needed to come from other sources. And a big contribution from trade should be expected given the significant mining investment of recent years. If the consumer and businesses go through a patch of slower spending the slack needs to be picked up by the Government. Indeed, the bigger issue is that Governments should be making an even bigger economic contribution given the current low level of interest rates.
Federal & State Government Investment
(% of GDP)
Goods & Services Balance
(% of GDP)
But productivity growth is too low
A bigger concern is that Australia’s productivity growth is currently at its slowest pace since the 1990s recession. Part of the slowdown is down to cyclical weakness. But there are also structural concerns. The slowing of business investment has played a part. Despite the weaker economy, firms note a key constraint is a lack of skilled labour. Firms have also marked down Australia a notch in a global comparison of how easy it is to do business.
Australia Productivity Growth
(GDP per hour worked, 5 year average)
Total Private Business Investment
(% of GDP)
Constraints On Profitability
(2 quarter average)
Australia Ranking On Ease Of Doing Business
Financial imbalances still focussed on the consumer
By global standards, corporate and government debt in Australia s relatively low. Unusually, the current account is in surplus. The main financial concern remains the consumer. Weak disposable income growth has meant households have reduced their saving rate. Household debt remains high. The result is that with any extra dollars consumers are likely to either pay down debt or boost their saving. Historically it has been easiest for consumers to increase saving when Governments’ have been reducing theirs (ie, by running a budget deficit that reduces taxes or increases spending). That is something that will probably be required on this occasion.
Sector Saving Ratio's
(% of gross disposable income)
Wisest Place For Saving - Payoff Debt
The Australian economy scrapes by with a pass
So what mark should we give the Australian economy over the past year? Private sector demand is weak, productivity growth low, household debt high. But we shouldn’t get too heavy with the red pen. It is hard to earn top marks in a global classroom of underperformers. The economic test being set central banks and governments is looking tough. Countries will need to work a little harder to get top-notch marks. Simply relying on central bank support will no longer be enough. Fiscal policy will need to sit more exams. Right now the Australian economy gets a C-. When it comes to the economy, Loudan Wainwright is right that no one like failure. Hopefully better marks are on the way next year.
We live in interesting times!
Peter Munckton - Chief Economist