Today’s Australian Bureau of Statistics – Australian National Accounts – for the December-quarter 2013, shows that real GDP growth was 0.8 per cent, up from 0.6 per cent in the September-quarter 2013. The annualised growth rate of 2.8 per cent is an improvement on the 2.3 per cent from last quarter but still remains well below the trend rate between 2000 and 2008 of 3.3 per cent. Growth is being driven by household consumption, net exports, and public consumption and investment. Without the contribution of the government sector, overall growth would have been negative over the last two quarters. This contribution, while welcome, will not be sustained given the current political environment. Overall, the data paints a fairly subdued picture for the Australian economy for the last three months of 2013.
The main features of today’s National Accounts release for the December-quarter 2013 were (seasonally adjusted):
- Real GDP increased by 0.8 per cent after recording a 0.6 per cent increase in the September-quarter.
- The main positive contributors to expenditure on GDP were the contributors to expenditure on GDP were Net Exports (0.6 percentage points), Final consumption expenditure (0.5 percentage points) and Public gross fixed capital formation (0.2 percentage points), the same contributors as last quarter.
- The main negative factors were Private gross fixed capital formation (-0.5 percentage points) – the second consecutive quarter of negative private investment expenditure.
- Our Terms of Trade (seasonally adjusted) improved in the quarter by 0.6 percentage points (reversing the recent falls) but in the 12 months to December 2013, they fell by 1.2 per cent.
- Real net national disposable income, which is a broader measure of change in national economic well-being rose by 0.7 per cent for the quarter and 1.8 per cent for the 12 months to the December-quarter 2013, which means that Australians are better off (on average than in 2012).
Overall growth picture – continuing to trend down
The following graph shows the quarterly percentage growth in real GDP over the last five years to the December-quarter 2013 (blue columns) and the ABS trend series (red line) superimposed. After the decline in trend growth was arrested by the fiscal stimulus in 2008-09 the decline in government support saw the dip in trend growth in 2010.
Initially, the growth in private investment associated with the record terms of trade and the resulting mining boom helped drive the new rise in trend growth and that appears to have ended in the December-quarter 2011.
As private investment boom has receded and the impact of fiscal austerity bites, growth has flattened out and the Australian economy is now stuck in a stagnant below trend growth state, which is insufficient to keep unemployment from slowly rising.
Real GDP growth and hours worked
One of the puzzles over the last several years or so has been the sharp dislocation between what is happening in the labour market and what the National Accounts data has been telling us.
Employment growth and hours worked has been virtually flat over the period while annual real GDP growth has been around 2.4 to 2.6 per cent. Today’s data suggests dislocation is continuing. Economic growth at around 2.8 per cent is still insufficient to absorb the labour force growth and productivity growth, especially as the latter being above recent trends. The two facts help to explain why employment growth has been unusually flat over the last 24 months.
It is true that employment growth tends to be a lagging indicator as firms make adjustments to hours first when contemplating increasing labour inputs. But unless labour productivity falls substantially, economic growth of the current magnitude will not deliver employment dividends of any significant amount in the coming year.
The following graph presents quarterly growth rates in trend GDP and hours worked using the National Accounts data for the last five years to the December-quarter 2013.
You can see the major dislocation between the two measures that appeared in the middle of 2011 persisted throughout 2013. While hours worked increased in the middle two quarters of 2013 and were more in line with what we would expect, the divergence between real output growth and hours worked has once again widened.
Just in case you think the labour force data is suspect, the hours worked computed from that data is very similar to that computed from the National Accounts.
To see the above graph from a different perspective, the next graph shows the annual growth in GDP per hour worked (so a measure of labour productivity) from the March 2007 quarter to the December-quarter 2013. The horizontal blue line is the average annual growth since March 2007.
The relatively strong growth in labour productivity in 2012 and the mostly above average growth in 2013 helps explain why employment growth has been lagging given the real GDP growth. Growth in labour productivity means that for each output level less labour is required.
In the recent four quarters, labour productivity growth has slowed but remains relatively strong. However, with the investment boom now seemingly over, we should start to see real GDP growth and employment growth start to converge back to more typical proportions.
Contributions to growth
What components of expenditure added to and subtracted from real GDP growth in the December-quarter 2013?
The ABS tell us that:
In seasonally adjusted terms, the contributors to expenditure on GDP were Public gross fixed capital formation (1.3 percentage points), Net Exports (0.7 percentage points) and Final consumption expenditure (0.4 percentage points). The detractors were Private gross fixed capital formation (-1.4 percentage points) and Changes in inventories (-0.5 percentage points).
The following bar graph shows the contributions to real GDP growth (in percentage points) for the main expenditure categories. It compares the December-quarter 2013 contributions (grey bars) with the September-quarter 2013 (blue bars).
The overall contribution of investment is negative (-1.1 percentage points) given that the sharp contraction for private capital formation (-1.3 percentage points) and the more subdued growth in public investment (0.2 percentage points).
Note that the strong contribution from net exports in the December-quarter 2013 (0.6 percentage points). This is driven by a small contribution from exports (0.5 points) and a drop in imports (0.1 points), the latter the result of below-trend growth.
The contributino of Private consumption is stable.
The public sector contribution (0.3 percentage points) is down from the 1.5 percentge points in the September-quarter. But it continues the pattern of government support for growth and the reversal of the fiscal contraction which began in the September-quarter 2013. With government support over the last six months, real GDP growth would have been -0.4 percent rather than 1.4 per cent. Who ever said that fiscal policy wasn’t effective?
The next graph shows the contributions to real GDP growth of the major expenditure aggregates since December-quarter 2012 (in percentage points). The total real GDP growth (in per cent) is also included as a reference.
The stand-out result is the recent reversal in the contribution of public capital formation and the negative contribution of private investment as the boom associated with the mining sector has ended and the record terms of trade moderate.
Household saving ratio drops below 10 per cent
The following graph shows the household saving ratio (% of disposable income) from 2000 to the current period. The household sector is now behaving very differently since the GFC rendered its balance sheet very precarious. Prior to the crisis, households maintained very robust spending (including housing) by accumulating record levels of debt. As the crisis hit, it was only because the central bank reduced interest rates quickly, that there were not mass bankruptcies.
The household saving ratio was 9.7 per cent of disposable household income in the December-quarter 2013, down from 10.6 per cent in the September-quarter 2013.
We will have to wait to see if households are starting to spend more and save less of their disposable income as a trend or whether the relatively strong consumption growth is being driven by the recent growth in Real net national disposable income. I suspect it is the latter.
For the economy to continue to grow strongly while households are maintaining this higher levels of saving (from disposable income), public spending, private investment and/or net exports have to increase.
Clearly, the contribution from private investment is now negative (over the last two quarters). The net exports contribution in the current quarter is strong and but insufficient to drive growth to its trend levels (around 3.25 per cent).
Which means that continued growth still requires a relatively strong contribution from the government sector.
The problem is that if incomes start to drop and the households continue to pursue this saving proportion aggregate demand will decline.
The household sector is now carrying record levels of debt as a result of the credit binge leading up to the crisis and we are unlikely to see a return to the low saving ratios that were evident in the period 2000 to 2005.
That means that government surpluses which were associated with the credit binge, and only were made possible by the unsustainable credit binge are untenable in this new (old) climate. The Government needs to learn about these macroeconomic connections.
A return to higher saving ratios is surely signalling a need for a return to more or less continuous budget deficits, depending on what happens to the external sector.
Today’s National Accounts data indicates that economic growth has accelerated a little but the trend pattern (a moving average of recent quarters) has converged for the time being around a below-trend growth path as the investment phase of the mining boom slows.
Remember that the National Accounts tells us what was happening in 3-6 months ago. The most recent evidence is mixed with some data showing improvement and other indicators showing the sluggish economy persists. It is hard to get a clear picture but the direction appears to be positive growth for the time being but not sufficient to put any dent into te high unemployment.
I think today’s national accounts data paints a fairly subdued overall picture for the Australian economy. Subdued without being disastrous.
That is enough for today!
(c) Copyright 2014 Bill Mitchell. All Rights Reserved.