Regular readers will know that I think the current inflationary phenomenon is transitory. They will also know that I see the continual claims by financial market economists that central banks have to increase interest rates now to avoid an accelerating inflationary episode as having little economic content and lots of self interest content. If rates go up, they win their bets and the more they can bully authorities to do their bidding the more certain their bets become profitable. I am glad that central banks around the world are resisting that game of bluff. In previous periods, they have not resisted and have handed the financial speculators (the top-end-of-town) massive and unjustified profits and forced millions of workers to endure joblessness. It is also interesting that the mainstream press is starting to work that out too. Some progress.
Today (December 1, 2021), the Australian Bureau of Statistics released the latest – Australian National Accounts: National Income, Expenditure and Product, September 2021 – which shows that the Australian economy contracted 1.9 per cent in the September-quarter. The annual growth rate of 3.9 per cent is relatively meaningless given the base was severely affected by the lockdowns last year. The decline in economic activity was driven by private demand, which contracted by 2.4 percentage points – mostly due to a decline in household final consumption expenditure. Public spending contributed 0.7 points to the GDP figure thus attenuating, to some extent, the fall in private demand. The increase in spending on health by both Federal and State governments was not large enough to avoid the contraction though. Real net national disposable income fell by 3.8 per cent, but rose by 7.8 per cent over the year. GDP per capita fell by 2 per cent in the September-quarter. There was a massive boost in the household saving ratio (from 11.8 per cent to 19.8 per cent) as a result of the tight lockdowns in Victoria and NSW during this period as a result of the renewed fiscal support. We will have to see how the rebound is next quarter now that the restrictions have been significantly eased. The most worrying thing about the data today is that the wage share in national income slumped further while the profit share in a smaller pie rose. Something needs to be done about that.
Yesterday (November 29, 2021), the Australian Bureau of Statistics released the latest – Business Indicators – for the September-quarter 2021. This dataset provides quarterly estimates of private sector sales, wages, profits and inventories. It provides a means of viewing exactly what has gone wrong with the Australian economy over the last two decades as successive governments have failed to prioritise general well-being, and, have instead, acted as agents of capital. There is a massive imbalance in the capacity of workers and profit-recipients to access national income that is produced by the workers. Profits have been booming while wages growth has been low for a long time now. And if you thought the booming profits would be siphoned into productive investment to lift productivity and create the non-inflationary space for real wage increases, then you would be wrong. The massive lift in profits has gone into unjustifiable increases in executive pay, property booms and financial market speculation. None of the things that help lift national prosperity and well-being.
Time series data is somewhat difficult to use at present because of the dramatic impact the pandemic (and the lockdowns) has had on behaviour. It is difficult to conduct precise statistical work that spans this period and in the future, econometricians like me will have to use special techniques to isolate these observations if we are to get anything meaningful from the data over longer horizons into the future. National accounts data is also fraught at the best of times because of the lags in collection and publication. It tells us where we were three months ago and three months before that. So while today’s data release from the Australian Bureau of Statistics of the – Australian National Accounts: National Income, Expenditure and Product, June 2021 (released September 1, 2021) – shows that the Australian economy grew by 0.7 per cent in the March-quarter after growing by 1.9 per cent in the March-quarter 2021. The annual growth rate of 9.6 per cent is relatively meaningless given the base effect noted above. Household consumption growth is positive but subdued. Business investment while positive has tapered somewhat. The external sector undermined growth as exports fell sharply. The public sector contributed 0.7 points to growth, which means that without that fiscal support (at both federal and state level), there would have been zero growth. With the NSW and Victorian economies now enduring a long lockdowns the next quarter will record negative growth and there is clearly a need for increased fiscal support.
The data release from the Australian Bureau of Statistics of the – Australian National Accounts: National Income, Expenditure and Product, March 2021 (released June 2, 2021) – shows that the Australian economy grew by a healthy 1.8 per cent in the March-quarter after growing by 3.2 per cent in the December-quarter 2020. Further, the economy is now 1.1 per cent larger than it was at the outset of the pandemic in March 2020. Household consumption growth is positive but subdued. Fiscal support is declining. But business investment is now recovering and is a really positive sign. Several sectors are still struggling and renewed outbreaks of the virus in recent weeks will further create these disparities. I consider there is still need for expanded fiscal support.
Coming off a low base. That is how to view the latest data release from the Australian Bureau of Statistics of the – Australian National Accounts: National Income, Expenditure and Product, December 2020 (released March 3, 2020). It shows that the Australian economy grew by 3.1 per cent in the December-quarter after growing by 3.4 per cent in the September-quarter. But the economy is still 1.1 per cent smaller than it was this time last year. The other thing to take from the data is that it once again confirms that nations that took the virus elimination strategy have done the best in economic terms compared to those nation which resisted tight lockdowns and other restrictions and are still enduring high infection rates and stalled economies. Household Consumption expenditure rose strongly as opportunities to spend increased and disposable income recovered somewhat. How long this considerable rebound can continue is another question. With the government fiscal support due to end soon and the base now higher, the coming quarters will not be as robust. And remember that the economy is still 1.1 per cent smaller and the labour market is still struggling and the Government’s fiscal support will still be required in certain sectors, which are still unable to achieve recovery (arts, tourism).
The answer to the question posed in the title is No! Lawrence Summers’ macroeconomic assessment does not stack up. In – Is the $US900 billion stimulus in the US likely to overheat the economy – Part 1? (December 30, 2020) – I developed the framework for considering whether it was sensible for the US government to provide a $US2,000 once-off, means-tested payment as part of its latest fiscal stimulus. Summers was opposed to it claiming that it would push the economy into an inflationary spiral because it would more than close the current output gap. Today, I do the numbers. The conclusion is that there is more than enough scope for the Government to make the transfers without running out of fiscal space.
The Australian economy officially exited recession in the September-quarter 2020, but I wouldn’t tell the labour market that. A technical recession, in case you were not aware, is defined as two, consecutive quarters of negative growth. But, given that employment always lags the start of a recovery, things remain much worse in the labour market than the GDP figures would indicate. Further, we still haven’t a clear idea of what will happen when the wage subsidy and the unemployment supplement schemes are wound back. If things are not well and truly pumping before the Government starts withdrawing the stimulus then bleak(er) times are ahead. The latest data release from the Australian Bureau of Statistics of the – Australian National Accounts: National Income, Expenditure and Product, September 2020 (released December 2, 2020) – shows that the Australian economy grew by 3.3 per cent in the September-quarter after contracting by 7 per cent in the previous quarter as a result of the extensive lockdowns. Household Consumption expenditure rose strongly as opportunities to spend increased and disposable income recovered somewhat. The wage share fell to record levels though (49 per cent) as the real wage growth was outpaced by productivity growth. Overall, I expect the next quarter (December) to be stronger given the recovery that Victoria will bring after opening its economy back up again.
Well now we have a better estimate of how far short the Australian government’s fiscal stimulus was when they introduced the packages in March and April. Massively short is the answer. The latest data release from the Australian Bureau of Statistics of the – Australian National Accounts: National Income, Expenditure and Product, June 2020 (released September 2, 2020) – is now recording the first three months impact on production and income generation of the lockdowns. The Australian economy collapsed basically, contracting by 7 per cent. Household Consumption expenditure fell sharply as households dramatically increased the saving ratio. The wage share fell below 50 per cent for the first time in recorded history as government support favoured profits. The obvious conclusion is that the Federal government has not supported an ailing economy enough to avoid the damage that negative growth brings. An urgent and major shift in fiscal policy towards further expansion is definitely required. But the government announced this week that they are withdrawing financial support and the result of that policy shift will be carnage!
The Australian Bureau of Statistics (ABS) published the June-quarter – Private New Capital Expenditure and Expected Expenditure, Australia – data today as part of the sequence of data releases relating to next Wednesday’s release of the second quarter National Accounts. Remember that this data is ‘backward’ looking, in that it tells us what has gone in the three months from April to the end of June. But it does provide the first signal of the impact of the first-stage lockdowns in April have had on capital formation. Today’s release confirms the worst with Total new capital expenditure falling by 5.9 per cent in the quarter and 11.5 per cent over the last 12 months. Investment in Building and structures fell by 4.4 per cent over the quarter and 9.4 per cent over the 12 month period, while investment in Equipment, plant and machinery fell by 7.6 per cent for the quarter and 13.8 per cent over the year. Crucially expected investment for 2020-21 has nose-dived (down 12.6 per cent on previous plans). By allowing the economy to go into recession and sustain mass unemployment and falling sales, the Australian government has made matters worse. Within the safe health constraints, it could have easily added another $A100 billion to its stimulus and seen unemployment drop to relatively low levels, major construction work undertaken in social housing to address the chronic shortfall, and invest in forward-looking green infrastructure. Instead, it has chosen to penny pinch and today’s figures are just the start of the damage this policy void is causing. This is another case of neo-liberal austerity white-anting the capacity of the economy to deliver prosperity for all.