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.
The US Bureau of Economic Analysis (BEA) released the – Gross Domestic Product, Second Quarter 2020 (Advance Estimate) – data last week (July 30, 2020). It shows that the US economy has declined by 9.49 per cent between the March- and June-quarters. On an annual basis the decline was 9.54 per cent. This is the largest quarterly contraction in recorded history. Consumption expenditure declined by 10.1 per cent in real terms and business investment by 17.4 per cent. The collapse in consumer expenditure was mostly concentrated in services (-22.6%), which reflected lockdowns and the unwillingness of consumers to continue normal practices. Personal saving as a percentage of disposable personal income jumped dramatically from 9.5 per cent in the March-quarter to 25.7 percent in the second quarter. That is a testament to the endemic uncertainty that the pandemic has created. The contribution of net exports actually rose, not because exports rose (their individual contribution was -9.38 points), but because of the slump in imports – a smaller leakage from the expenditure system (adding 10.1 points t growth!). Overall, there is no trend – just a massive mess. How the second wave of the virus impacts is anybody’s guess but lots more deaths and more disruption is certain.
Australia has endured a sequence of unplanned disasters over the last 12 months. The lingering effects of a long drought. Massive bushfires. Floods. And, then, if that wasn’t enough, along comes the worst of them all – the coronavirus. The latest release by the Australian Bureau of Statistics of the – March-quarter 2020 National Accounts data (June 3, 2020) – is now recording the early impacts on our national economy from the Pandemic. It will be worse when the June-quarter figures are released in September. Today’s data confirms what we have been tracing for several quarters – the Australian economy has now crossed the line into negative growth with sustained negative contributions from all private sources of expenditure. Household Consumption expenditure fell sharply as households increased their saving ratio. The overall contraction is less than has been recorded to date in other nations. But we should wait until the June-quarter before we get too optimistic. 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.
A fairly short post today (Wednesday oblige!). So just some snippets. Today, the Australian Bureau of Statistics published the latest – Retail Trade, Australia, Preliminary, February 2020 – which was the first release of a “suite of new products for Australian retail turnover”. The new offering is designed to more accurately and immediately pick up the “economic impact of coronavirus”. This release is preliminary and gives us more current data to that which is published in the upcoming April Retail Trade, Australia. The news is not good, as you might expect. Retail trade rose by 0.4 per cent in February 2020, as food purchases rose but all other spending categories fell. So the result is driven by the ridiculous panic hoarding behaviour that is now common. I went to a supermarket last night on the way home to get a few items (like some oats for muesli) and the shelves were nearly empty across a wide range of products. It makes no sense. Even if we are to be locked down, the Government has said shopping will be allowed. But in other sectors of the economy major impacts are being felt. All by band’s gigs in Melbourne have been cancelled and Virgin (who I fly with mostly) have cancelled all international flights until at least the end of June and many domestic flights. Life is changing dramatically. And this would be a great time to introduce a Job Guarantee for artists and musicians. Further, I report on some statistical events in West Africa that have far-reaching implications for how nations interact with multilateral agencies such as the IMF or the World Bank.
We have had a long drought. Massive bushfires. Floods. And, now, the coronavirus to deal with. The latest release by the Australian Bureau of Statistics of the – December-quarter 2019 National Accounts data (March 4, 2020) – allows us to see some of the impacts of the bushfires, given it is a rear-vision view of where the economy was at in the last three months of 2019. The next quarter’s data (due early June) will start to tell us about the coronavirus effects. Today’s data confirms what we have been tracing for several quarters – the Australian economy is grinding to a halt with private business investment continuing to decline and only a falling household saving ratio keeping Household Consumption expenditure moving in the face of flat income growth. The data shows that annual GDP growth of 2.2 per cent remains well below the historical trend rate of between 3.25 and 3.5 per cent. The weaker performance started in the last 6 months of 2018 and has continued through 2019. Further, as the recent favourable terms of trade (as a result of the Brazilian environmental disaster) have reversed, Real net national disposable income is now falling, signifying falling material living standards. As a result of the falling terms of trade, exports have shrunk and will shrink further on the back of the virus impacts. In an environment where household debt is at record levels, the risks of unemployment are rising, wages growth remains stagnant, and business investment continues to contract – the recent negative shocks from fire, flood and now the virus expose the economy to a major contraction. The overall picture is not good and the future is looking rather dim at present. An urgent and major shift in fiscal policy towards expansion is definitely required.
In my blog post – Japan about to walk the plank – again (September 30, 2019) – I predicted that the decision by the Japanese government to increase the sales tax from 8 per cent to 10 per cent on October 1, 2010 would undermine non-government spending and growth and was totally unnecessary anyway. The government had fallen prey to the deficit terrorists who have been consistently bullying them into believing that their fiscal position is about to collapse and the bond markets would desert them. Funny that! The Bank of Japan has been buying the bulk of the public debt issued over the last several years anyway. The reality is that, given the instability of world conditions (US-China trade, European slowdown, Brexit, and, more recently, the Corona virus impacts), the Japanese government should have been increasing its fiscal deficit. Yesterday (February 17, 2020), the latest national accounts data from Japan tells us the damage that this policy folly has inflicted. Every time the Japanese government has hiked the sales tax (1997, 2014, 2019) real GDP growth has plummetted and pushed the economy into recession. In the final quarter of 2019, Japan’s growth rate slumped by an annualised 6.3 per cent, driven by a massive 11.1 per cent decline in consumption spending and capital investment decline of 14.1 per cent. Sure enough, Typhoon Hagibis was also a factor but it is undeniable that the sales tax hike was instrumental. The Spanish philosopher George Santayana had it in one when in his first volume (1905) of his book – The Life of Reason: The Phases of Human Progress – said: “Those who cannot remember the past are condemned to repeat it”.
I have two days of teaching left in Helsinki and my next stop on Friday is Dublin where I will be discussing unification and exit. Should be a fun topic. Its Wednesday back home already and today I consider a matter that came up in one of my classes that I am taking in macroeconomics at the moment at the University of Helsinki. Students really struggle when first introduced to the idea of a stock and a flow. They can easily be led into defining a flow as a stock. Getting this absolutely right is one of the key building blocks in understanding basic macroeconomics and the links between the expenditure system and financial accumulation. Modern Monetary Theory (MMT) builds heavily on the difference between stocks and flows and is also what we call stock-flow consistent. So all flows that inform stocks are accounted for in a consistent way. So, for example, we know that when households save, which is the residual of disposable income that is not consumed and a flow, this accumulates into a stock of financial wealth. Today, I am seeking to clarify the issue in my class that we did not have sufficient time to deal with in detail last week. And after that, some music to restore sanity.
The latest release by the Australian Bureau of Statistics of the – September-quarter 2019 National Accounts data (December 4, 2019) – confirms what we have been tracing for several quarters – the Australian economy is grinding to a halt, households are trying to increase saving, the Government’s tax cuts from July seem to have been largely saved to run down debt rather than spent, business investment is weak, and government spending and the terms of trade boost to exports are the only thing between now and a recession. And, the government is in denial, thinking its fiscal surplus obsession is more important than protecting incomes and growth. The problem is that if you don’t do the latter, you can kiss the former goodbye anyway. The data shows that annual GDP growth of 1.7 per cent is around 1/2 the historical trend rate. This is a very poor on-going result. The weaker performance started in the last 6 months of 2018 and has continued into the first six months of 2019. However, due to a fairly strong terms of trade, Real net national disposable income rose, which signifies rising material living standards. But those terms of trade gains will prove to be ephemeral. Overall, the quarterly growth rate was just 0.4 per cent. Net exports were strong (terms of trade effect) and government consumption expenditure was strong courtesy of some policy measures in disability, health and aged care coming on-line. Their boost will also dissipate fairly quickly. Longer-term worries include the weakening household consumption growth and the on-going negative business investment growth. The data now lets us appraise whether the small tax cut stimulus the government introduced from July have been very effective. In an environment where household debt is at record levels, the risks of unemployment are rising, and wages growth remains stagnant, it is no surprise that the households are using their tax savings to reduce their risk levels. This is borne out by the rising saving ratio. The overall picture is not good and the future is looking rather dim at present. A major shift in fiscal policy towards expansion is now definitely required.
The US Bureau of Economic Analysis (BEA) released the – Gross Domestic Product, Third Quarter 2019 (Advance Estimate) – data yesterday (October 30, 2019). It shows that the US economy “increased at an annual rate of 1.9 percent in the third quarter of 2019” which was slightly slow than the 2 per cent recorded in the June quarter. As this is only the “Advance estimate” (based on incomplete data) there is every likelihood that the figure will be revised when the “second estimate” is published on November 27, 2019. Underlying the headline figure, however, are shifting expenditure patterns in the US. Household consumption growth is declining and the contribution to growth was down from 3.03 points in une 2019 to 1.93 points. The personal saving rate rose from 8 per cent of disposable income to 8.1 per cent as households tightened up in the face of record levels of debt and sluggish wages growth. Total investment continued to be a negative drain on growth (-0.27 points compared to -1.16 points. Net exports also subtracted from growth (0.08 points compared to 0.68 points in the June-quarter). The increase in disposable personal income was lower (4.5 per cent) than in the June-quarter (4.8 per cent), although in real terms, the growth was 2.9 per cent compared to 2.4 per cent. Overall, and notwithstanding the continued growth, the question for the US growth prospects centre on what will happen to consumption expenditure growth. How much more will it decline and the saving rate rise?