The collective fawning over the March quarter growth figures by the press gallery shows a thorough misunderstanding of Australia’s economic predicament and is a testament to the spinning ability of the Rudd Government. Instead of popping the champagne, Australians should be fumbling for the Jack Daniels. While Australia technically avoided being in recession (along with only Poland and South Korea), the numbers certainly did not look good.
Crucially, the main major contributor to the March quarter “growth” was a decrease in imports. In determining GDP, economists consider consumer spending, business investment, government and net exports (being exports less imports). In the March quarter, imports slumped by 7% while exports rose by 2.7%, leading to a 2.2% rise in net exports — ignoring the drop in imports and Australia would have been in recession, technically speaking of course. (Crikey’s usually very astute political commentator, Bernard Keane, got it slightly wrong yesterday when he noted “it’s not surprising … the main positive contributor to expenditure on GDP was imports. Someone had to be buying them.” — imports are a negative contributor to GDP, it was actually falling, not rising, imports which contributed to the higher than expected growth figure).
While boosting the headline GDP number, falling imports are arguably a talisman for deeper problems. As the ABC’s Stephen Long noted, “why did imports fall? Largely because business investment has collapsed and companies aren’t importing the capital equipment and production goods that they were during the good times.”
GDP was also boosted by a 0.6% rise in consumer spending, it was this fact which so excited Kevin Rudd and his bevy of admirers in the gallery. Much of the rise was caused by the $900 stimulus payments provided to taxpayers, along with the disastrous boosted First Home Owner’s grant. The increase in consumption was virtually a direct result of increased government borrowing.
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While Keynesians would argue such spending is a necessary evil, to celebrate increased debt is truly bizarre. Imagine an overleveraged householder who acquired a new Porsche (predominantly using debt to fund the purchase). No doubt the householder increased spending, but in reality, their net asset balance has worsened, they effectively traded one asset (cash) for another asset (vehicle) and corresponding higher liabilities. Those liabilities eventually need to be repaid. Would you commend the new Porsche owner or raise an eyebrow, knowing full well that they couldn’t really afford the car?
Dan Denning expressed the problem succinctly in the Daily Reckoning yesterday, noting:
By boosting consumer spending with borrowed money, the government detracts from Australia’s long-term health for a short-term political benefit. Healthy consumption is financed from production. You make something. You sell it. The income you generate pays for the things you buy.
But in the interests of generating the appearance of activity, the government borrowed money so people would spend it (or spent the surplus accumulated in the boom years). That’s debt-financed consumption, an economic stupidity that has led America into a national nightmare. That is what the Aussie government seems to be encouraging and crowing about today.
Another point which was well noted by The Australian yesterday, was that in per capita terms, GDP actually fell by 0.1% — growth was spurred by increased population, not the existing population getting richer. Further, new private machinery and equipment investment fell by 9.5% in the quarter while non-dwelling construction slumped by 4.3%.
Taking money from one part of the population and handing it to another (to spend on pokies or plasma televisions) does not lead to lasting investment and sustainable growth (unlike say, business investment spending). It seems that the Rudd government have forgotten (or ignored) that economic growth is simply a means to an end – that end is improved standards of living.
While a debt-fuelled binge may provide a temporary boost in economic activity (and also, perhaps more importantly, in Labor’s primary vote) it will ultimately lead to reduced living standards for future generations who have to repay the accumulated borrowings.