While most of the media were cheering “better than expected” national accounts numbers yesterday and Treasurer Josh Frydenberg was celebrating the “resilience” of the Australian economy, the data shows why we’re in a great deal of trouble even if the government unveils a virus-related stimulus program next week.
Given the reaction yesterday to the December quarter GDP numbers — 0.5% for the quarter, 2.2% for calendar 2019 — we seem to have permanently relocated to a world where 2-2.25% growth is a cause for celebration. For people with slightly longer memories than many journalists and commentators, trend growth for the Australian economy used to be around 3% to 3.25%.
The strongest calendar year growth in the past decade was in 2011 when GDP grew 3.3% — and that was while the dollar was at parity against the US dollar or higher, and included a contraction of 0.3% in the March quarter due to Queensland and Western Australian cyclones that wrecked mineral exports for months.
Calendar 2012 saw growth of 2.9% and thereafter the economy has never hit 3%. The best year for the Coalition was calendar 2016 when GDP rose 2.8%. Wisely, both the Abbott and Turnbull governments resisted trying to rush back to surplus during the period.
The story of the December quarter, and of 2019 overall, was of a flatlining domestic economy kept going only by government spending and mining exports.
You know the domestic story: wages growth and business investment is weak and have contracted. There was a pick-up in household discretionary spending in the quarter — a tiny one — which the ABS attributed to “sales events” (i.e. Black Friday back in November), but overall household expenditure growth is still at its lowest levels in a decade.
What might have been good news on another front was also problematic.
The household savings ratio of 3.6% fell from 4.8% in the September quarter, which might normally suggest higher expenditure. In this case, it was because the tax offsets handed out by the Morrison government stopped going to households, which were using them to pay down debt.
“The fall in gross disposable income resulted in the household saving ratio declining from 4.8% in the September quarter to 3.6% in the December quarter 2019,” the Australian Bureau of Statistics (ABS) said. “The fall in gross disposable income was driven by a 9.3% increase in tax payable following a strong decline with the introduction of the low and middle income tax offset last quarter.”
Some early insurance claims from the bushfires also made their way to households. According to the ABS, “non-life insurance claims contributed to household income reflecting increased claims attributed to natural disaster occurrences in the quarter.” There’ll be a lot more of that in the March quarter, providing a welcome offset to some of the negatives of the bushfires.
There was a small lift in mining investment — though nowhere near enough to offset the overall fall in investment. Mining’s contribution to growth in the December quarter was via a rise in production, not higher prices.
Prices for key export commodities actually fell during the quarter, reducing our terms of trade by 5.3%. This reduced nominal GDP, which fell 0.3%, as lower coal, iron ore and gas prices hit company profits. This will translate into lower corporate tax collections.
That is also why the current account surplus (which the treasurer boasted about in his press conference yesterday) fell to $1 billion from $9.2 billion in the three months to December. Overall, net exports contributed 0.1 of a percentage point to GDP growth, but that came from a fall in imports — they fell 0.5% in the quarter and 1.5% over the year, which underlines the weakness in domestic demand, especially from households.
So, yet again, government spending proved crucial to supporting growth, adding another 0.1% to the quarter’s growth.
The Reserve Bank and business have been calling for fiscal stimulus for over a year. The caveat for that is that governments have been providing stimulus: via the major infrastructure spending programs undertaken by the NSW and Victorian governments, and by federal government spending on health and education, which drove the Turnbull-era jobs boom.
That public sector contribution has propped up GDP growth and employment — and even boosted wages growth in the health sector to around 3% — but hasn’t been enough to help the rest of the economy catch fire, lifting overall consumer sentiment and propensity to spend, or business willingness to invest.
There’s thus a lesson in yesterday’s numbers for the stimulus the government is currently considering.
What spending can it undertake that will not merely cushion the economy from the major downturn now enveloping it, but get business spending and boost consumer confidence (panic buying will bring forward consumer spending, but not provide a lasting boost for retail)? A depreciation allowance will certainly help with the former and now appears certain.
But some sort of spark is needed to lift overall sentiment and, once coronavirus is behind us, get the economy back to growing above 2.5% — even if the days of 3% now look long gone.