I have recently had discussions with a PhD student of mine who was interested in exploring the cyclical link between productivity growth and the economic cycle in the context of the intergenerational debate about ageing and the challenge to improve the former. The issue is that sound finance – the mainstream macroeconomics approach – constructs the rising dependency ratio as a problem of government financial resources (not being able to afford health care and pensions) and prescribes fiscal austerity on the pretext that the government needs to save money to pay for these future imposts. Meanwhile, the real challenge of the rising dependency is that the next generation will have to be more productive than the last to maintain real standards of living and if austerity undermines productivity growth then it just exacerbates the ageing problem. My contention has always been the latter. That governments should use their fiscal capacity now to make sure there is a first-class education and training system in a growth environment to prepare us for the future when more people will have passed the usual concept of working age. This question also is hot at the moment in the Brexit debate in Britain and in this blog post I offer some empirical analysis to clear away some of the myths that the Remainers have been spreading.
I am in Brisbane today as an expert witness in an industrial hearing where the public education workers are trying to secure a wage increase in the face of fierce opposition from the Labor State government who insist on maintaining a wage cap that is depressing income growth and helping to cause the economic slowdown. The Government’s defense is that a wage rise would damage their fiscal plans which are to record recurrent surpluses of such magnitude that they can fund all capital spending out of recurrent revenue. Yes, a modern Labor government at work. They seem unable to that their suppression of wages growth is undermining overall growth, which undermines their tax revenue and makes their ridiculous fiscal goal unattainable anyway. Walking around in increasingly smaller circles. Anyway, it was a good day to be discussing these matters as it coincided with the latest release by the Australian Bureau of Statistics of the – June-quarter 2019 National Accounts data (September 4, 2019). That data shows that annual GDP growth of 1.4 per cent (down from 1.6 per cent) and now around 1/3 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 and a related to disturbances in world markets (Brazil, etc). Overall, the quarterly growth rate was just 0.5 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 weak household consumption growth and the on-going negative business investment growth. Further, the fall in the saving ratio once again illustrates the folly of suppressing wages growth through wage caps etc. It is also apparent that the positive spending effects of the large government infrastructure projects (State-level) are now working their way through the system and their impact is declining. The overall picture is not good and the future is looking rather dim at present. A major shift in fiscal policy towards expansion is definitely now required.
The Australian Bureau of Statistics released the latest March-quarter 2019 National Accounts data today (June 5, 2019) and the data shows that annual GDP growth of 1.8 per cent is around half 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 three months of 2019. However, due to a fairly strong terms of trade, Real net national disposable income rose, which signifies rising material living standards. Overall, the quarterly growth rate was just 0.4 per cent. The weakness is exemplified by slackness in private domestic demand – weakening household consumption growth and poor business investment growth. The rise in the saving ratio recorded in the December-quarter may signal that households are finally just accepting that their consumption growth will have to be more subdued as they struggle with poor income growth and record levels of debt. The large government infrastructure projects (State-level) and public consumption expenditure are driving growth. Net exports also contributed to growth on the back of the rising terms of trade. The overall picture is not good and the future is looking rather dim at present.
Last Friday (April 26, 2019), the US Bureau of Economic Analysis published their latest national accounts data (advance estimate) – Gross Domestic Product, First Quarter 2019 (Advance Estimate) – which tells us that the annualised real GDP growth rate of 3.2 per cent surprised most commentators (for its strength). 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 May 30, 2019. Underlying the strong headline figure, however, are shifting expenditure patterns in the US. Household consumption growth is declining and the contribution to growth was down from 1.7 points in December 2018 to 0.82 points. The personal saving rate rose from 6.8 per cent of disposable income to 7 per cent as households tightened up in the face of record levels of debt and sluggish wages growth. The investment rose and Gross private domestic investment also contributed 0.92 points to growth, up from 0.66 points. However, that contribution was driven mostly by a rise in inventories, which can signal two things – either unsold goods due to firms overestimating domestic demand or stock-building in expectation of stronger future spending. I suspect it is the first of these explanations. Further, net exports were a strong contributor (1.03 points) after undermining growth in the December-quarter 2018. Real disposable personal income increased 2.4 per cent (down from 4.3 per cent in December). Overall, and notwithstanding the strong growth, the problems for the US growth prospects are two-fold: (a) What will be the contraction in consumption expenditure growth with slow wages growth and elevated personal debt levels? Most of the consumption growth is coming because more people are getting jobs even though wages growth is flat. (b) Can net exports growth defy Trump’s trade policy? We will wait and see.
The Australian Bureau of Statistics released the latest December-quarter 2018 National Accounts data today (March 6, 2019) and we learn that in the last 6 months of 2018, the Australian economy descended into a recession in GDP per capita terms. That is, for the last two quarters of 2018, growth in GDP per capita was negative. However, due to a fairly strong terms of trade, Real net national disposable income rose, which signifies rising material living standards. Overall, the Australia economy has slowed considerably. The quarterly growth rate fell to just 0.2 per cent and 2.3 per cent (down from 2.8 over the 12 months to December 2018). However, the annual result is influenced by the outlier March-quarter. The annualised growth rate is really around 0.8 per cent, which is very poor. The economy remains reliant on household consumption expenditure, which is now moderating. Both private sector investment and the external sector are detracting from growth. The stark result is that without the contribution of the government sector, the Australian economy would have been deemed to be in recession now. There is a high probability that household consumption expenditure will slow further. The overall picture is not good and the future is looking rather dim at present.
On December 19, 2018, the Federal Reserve Bank Open Market Committee (FOMC), which determines the monetary policy settings in the US, increased the policy interest rate by 25 basis points to 2.5 per cent, as part of its plan to ‘normalise’ monetary policy. Even within the parameters of their own logic, it is hard to see any inflation threat. Long-term inflationary expectations suggest that people expect an unchanged situation over the next decade. Which suggests that the current unemployment rate is not seen as a threat to the price level. Now, while the FOMC decision may or may not cause some slow down in real GDP growth, given the blunt and ambiguous nature of monetary policy adjustments, the really disturbing aspect of the policy change is the fact that the FOMC members were plotting to push up unemployment by more than 1.2 million people as a plan to lower the inflation rate by a few basis points. Not only is that an obscene revelation but the fact that the FOMC use economic models that cannot tell them that the economic costs of such a shift are massive compared to any benefits that might arise from a slightly lower inflation rate tells us that policy is being made using deeply flawed, useless economic theory and models. Moral bankruptcy and incompetence rules.
The current conflict in France, while multidimensional, is a reflection that the neoliberal austerity system is not working for ordinary people. All sorts of cross currents feed in to this discontent, some of which (for example, distaste for foreigners/migrants) are clearly not to be encouraged. Most of the claims of the Gilets Jaunes are about the alienation, exclusion and poverty that they feel living in the neoliberal, corporatist EU world. A lot of so-called progressives are out there claiming this is a right-wing ruse advancing climate denial and anti-migrant sentiment. But I consider that to be a typical elite response to any EU discontent to avoid discussion of exit and the paint the critics as being stupid and/or racist. A replay of the Brexit accusations from the Remainers. But the writing is on the wall for the Eurozone countries. People will only tolerate being put down and oppressed for so long. And all is not well elsewhere. Even when a nation has its own currency and has the capacity to avoid the sort of stagnation that many European nations are now wallowing in, the universality of the neoliberal austerity bias is making life hard for not only the low-income cohorts, but, increasingly for the lower tiers of the ‘middle class’ (defined in income terms). Australian workers are feeling that pinch in the land of plenty.
The Australian Bureau of Statistics released the latest September-quarter 2018 National Accounts data today (December 5, 2018) and the result show that in the past three months, the Australia economy has slowed considerably. The quarterly growth rate fell to just 0.3 per cent and 2.8 per cent (down from 3.4) over the 12 months to September 2018. However, the annual result is influenced by the outlier March-quarter. The annualised growth rate is really around 1.2 per cent, which is very poor. The economy remains reliant on household consumption expenditure, which, in turn, is being driven by credit and declining savings as household income growth moderates. Exports provided no growth filip. The large government infrastructure projects (State-level) are driving growth and without the government contribution in the September-quarter, the Australian economy would have recorded a zero growth rate. The contribution from private investment was negative and the outlook is not bright. That is an unsustainable mix. There is a high probability that household consumption expenditure will slow right down as debt levels become unmanageable. Whether that happens will depend on the wages growth trajectory in future quarters and the outlook on that front is mixed. All this means that the current overall growth trajectory is shaky.
On Thursday (November 8, 2018), the British Office of National Statistics (ONS) released the – GDP first quarterly estimate, UK: July to September 2018 – data, the first release under their new publication model, which is designed to improve “the accuracy and reliability” of the initial (formally denoted the “preliminary”) release. The next update will come in December and the expectation is that there will be less revisions, which is a good thing for those trying to assess where things are at. Remember, also that national accounts data is a rear-vision view of the economy – where its been rather than necessarily where it is at, although the two ‘views’ are obviously linked. The third-quarter national accounts data shows that Britain grew by 0.6 per cent, with “all four sectors” contributing to what is a strong result. But, under the headline, are mixed trends: household consumption spending continues to grow with rising debt, although wages growth appears to be moving finally; business investment was negative; and net exports “contributed 0.8 percentage points” with a strengthening of exports. What the data tells us at this stage is that Britain continues to defy the claims that a meltdown is imminent as a result of Brexit. There appears to be a resilience that is driving relatively strong growth. And, for all those who have been hammering the point that Britain is the worst-performed (in growth terms) of the EU Member States, they will have to revise their scripts. Britain is now growing much faster than many other European economies.
Last Friday (October 26, 2018), the US Bureau of Economic Analysis published their latest national accounts data – Gross Domestic Product, 3rd quarter 2018 (advance estimate) , which tells us that the annualised real GDP growth rate for the US remains strong at 3.5 per cent (down from 4.2 per cent in the June-quarter 2018). Note this is not the annual growth over the last four-quarters, which is a more modest 3 per cent (up from 2.9 per cent in the previous 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 28, 2018. The US result was driven by a growing household consumption contribution (2.7 points) with the personal saving rate falling by 0.4 points. Further, the government spending contribution was also strong (0.6 points up from 0.4) with all levels of government recording positive contributions. Real disposable personal income increased 2.5 percent, the same increase as in the second quarter. While private investment was strong it was mostly due to unsold goods (inventories). Notwithstanding the strong growth, the problems for the US growth prospects are two-fold: (a) How long can consumption expenditure keep growing with slow wages growth and elevated personal debt levels? Most of the consumption growth is coming because more people are getting jobs even though wages growth is flat. (b) What will be the impacts of the current trade policy? It is a work in progress.