In the June-quarter, it was only the contribution of public spending that allowed the Australian economy to avoid negative growth. That contribution disappeared in the September-quarter and given the fiscal settings and the negative investment contributions it was obvious that Australia would slide closer to recession – recording negative growth for the first time since the September-quarter 2011. The fact is that the non-mining part of the economy is already in recession and has been for some time. Today, the Australian Bureau of Statistics released the – September-quarter 2016 National Accounts data – which showed that real GDP had indeed slumped to record a negative 0.5 per cent outcome. Annual growth (last four quarters) has fallen to 1.8 per cent, but the September-quarter outcome is closer to where we are now rather than what happened towards the end of last year and earlier this year. The Australian economy has been marching inexorably towards recession for the best part of this year and government refuses to budge from its attempts to impose fiscal austerity. Madness is a euphemism for their policy conduct. Incompetent also comes to mind. the September-quarter result has been driven by a negative contribution from private capital formation, net exports and now public spending. The only on-going positive contribution to growth came from household spending. My experimental research (which I will blog about when I am more certain of the methodology) show that when we take out the mining sector, Australia has been in recession or near it for some quarters and only the government contribution has made the difference between the two states. The on-going negative growth in private investment means that potential output in Australia and future growth rates will be lower than otherwise. Not a positive sign. The data continues to confirm that Australia faces a very uncertain outlook and with the Federal government intent on imposing austerity, then the nation is probably already recession overall (given the National Accounts data is already three months old). That should be a huge wake up call for the Federal government which is currently trying to bully the Senate into accepting massive cuts in public expenditure.
The main features of the National Accounts release for the September-quarter 2016 were (seasonally adjusted):
- Real GDP decreased by 0.5 per cent after recording a 0.5 per cent increase in the June-quarter. The annual growth rate is 1.8 per cent, which is well below the rate that is required to keep unemployment from rising given productivity and labour force growth.
- The annualised extrapolation from the September-quarter result is minus 2 per cent growth – that is recession. Another quarter like the last and Australia will enter recession.
- The main positive contributor to real GDP growth was Household final consumption expenditure (0.3 percentage points).
- The main negative contributing factors were the decline in Private gross fixed capital formation (0.6 percentage point negative impact on growth), Public capital formation (-0.5 points negative impact on growth), and the external sector (0.2 percentage point negative impact).
- The public sector overall (consumption and investment) undermined growth in the September-quarter by 0.5 points.
- Our Terms of Trade (seasonally adjusted) rose by 4.5 per cent in the quarter and 1.5 per cent over the 12 months to the end of June 2016. This is a reversal of the recent negative trend and only serves to show how bad today’s figures are.
- Real net national disposable income, which is a broader measure of change in national economic well-being rose by 0.8 per cent for the quarter and by 3.2 per cent for the 12 months to the September-quarter 2016, which means that Australians are better off (on average) than they were at that point 12 months ago.
- The Household saving ratio (from disposable income) fell from 8 per cent to 6.3 per cent and remains well below the levels we saw just after the GFC. The problem now is that flat wages are straining households who are resorting to credit to sustain consumption expenditure.
Overall growth picture – negative growth returns – recession next unless policy changes
The following graph shows the quarterly percentage growth in real GDP over the last five years to the September-quarter 2016 (blue columns) and the ABS trend series (red line) superimposed.
Growth was negative in the September-quarter 2016 – minus 0.5 per cent (annualised minus 2 per cent).
The annual growth figure of 1.8 per cent is down from 3.1 per cent in the June-quarter and shows how far the economy has slipped. It is now well below trend growth and well below the figure required to maintain stable unemployment (much less reduce it).
The annualised growth from this quarter (if continued) means Australia will enter a deep and totally unnecessary recession that has been chosen by the Federal Government, which claims it is intent on pursuing a fiscal surplus.
The automatic stabilisers are already working against that and the ABS announced yesterday that Taxation revenue fell a further 15.3 per cent in the September-quarter against a very small increase in spending.
In the June-quarter, it was the large boost in public sector infrastructure spending that saved the economy from negative growth such was the overall weakness of non-government spending. As we will see soon, that contribution turned negative and so went the aggregate growth position.
While exports continued to grow (with an uptick in the terms of trade), the external sector overall subtracted from growth (see below).
Add to that the fact that domestic wages growth is flat and household indebtedness is at record levels and you have a fairly sober outlook.
If the government sector persists in implementing its planned spending cuts then recession looms for the Australian economy.
The graph clearly shows that the trend has been downwards for 4-quarters now and will hit zero by the time we learn about the current December-quarter data unless there is a dramatic shift in government policy. It must announce renewed stimulus or face recession.
Analysis of Expenditure Components
The following graph shows the quarterly percentage growth for the major expenditure components in real terms for the September-quarter 2016 (blue bars) and the June-quarter 2016 (grey bars).
The large swing in public sector expenditure is clear and largely responsible for the negative growth overall.
Domestic demand growth fell by 0.47 per cent in September-quarter down from 0.81 per cent in the June-quarter 2016.
This was the result of continued growth albeit modest in household consumption (0.44 per cent growth down from 0.0.46 per cent).
Private investment continued to fall (-0.8 per cent) after a decline of 2.6 per cent in the June-quarter 2016. Perhaps we are at the end of this large decline in private capital formation.
Exports fell from 2.1 per cent growth in the June-quarter to 0.28 per cent in the September-quarter despite the 4.5 per cent improvement in the Terms of Trade.
Growth in import spending outstripped the growth in exports meaning that the external trade contribution to growth was negative (see below).
Contributions to growth
What components of expenditure added to and subtracted from real GDP growth in the September-quarter 2016?
The following bar graph shows the contributions to real GDP growth (in percentage points) for the main expenditure categories. It compares the September-quarter 2016 contributions (gray bars) with the June-quarter 2016 (blue bars).
Net exports subtracted 0.2 percentage points from growth in the September-quarter (stable negative contribution) driven by a decrease in the contribution from exports being outstripped by a falling (negative) contribution from imports.
Private household consumption contributed a stable 0.3 percentage points to growth but this has fallen in the course of 2016.
The public consumption contribution fell to zero (down from 0.4 percentage points in the last quarter).
But it was public investment (capital formation) undermined growth by 0.5 points after contributing 0.7 points to growth last quarter.
The overall contribution of the government sector to growth was negative at 0.5 percentage points. The swing in government contribution reflects the lumpiness of large public infrastructure purchases (up last quarter, down September) and the failure of the Federal government to adjust its fiscal settings towards stimulus.
The overall contribution of private investment on growth continued to be negative (-0.2 percentage points), which confirms that the investment cycle associated with the mining boom is well and truly over and non-mining investment is not picking up the slack.
The next graph shows the contributions to real GDP growth of the major expenditure aggregates since the September-quarter 2015 (in percentage points). The total real GDP growth (in per cent) is also included as a reference.
Only household consumption has not turned negative in the last quarter.
Australians are better off now in income terms than they were in June 2015
The ABS tell us that:
A broader measure of change in national economic well-being is Real net national disposable income. This measure adjusts the volume measure of GDP for the Terms of trade effect, Real net incomes from overseas and Consumption of fixed capital.
While real GDP growth (that is, total output produced in volume terms) fell by 0.5 per cent in the September-quarter, real net national disposable income growth grew by 0.8 per cent (down from 0.6 per cent in the June-quarter). This is largely the result of improving terms of trade over this period.
Real net national disposable income growth has been weak since 2011 and has been criss-crossing the zero line for the last three or so years.
Over the last year (to end of June 2016), real net national disposable income has increased by 3.2 per cent which means that Australians are better off in income terms than they were in June 2015.
The following graph shows the evolution of the quarterly growth rates for the two series since the September-quarter 2006.
Household saving ratio fell to 6.3 per cent
The squeeze on wages in Australia is manifesting in two ways. Rising indebtedness and falling saving out of disposable income.
The following graph shows the household saving ratio (% of disposable income) from 2000 to the current period. The household saving ratio fell to 6.3 per cent in the September-quarter 2016 from 6.7 per cent in the June-quarter.
The ratio has been falling since the June-quarter 2014.
Further, even though Household consumption expenditure remains positive and helping maintain overall growth in the face of negative contributions from private investment, government and net exports, it is clearly growing modestly as a result of the subdued real wages outcomes.
The decline in the Household saving ratio from its 2011 levels was associated with a renewed rise in household indebtedness – back to record levels.
After the GFC hit, the household sector sought to reduce the precariousness in its balance sheet exposed by the GFC.
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.
In June 2012, the ratio was 11.6 per cent. Since the December-quarter 2013, it has been steadily falling as the squeze on wages has intensified.
While the recent trend has been downwards, it is unlikely that households will return to the very low and negative saving ratios at the height of the credit binge given that the household sector is now carrying record levels of debt.
At some point, household consumption growth will fall unless growth is supported by public spending (given the poor outlook for private investment and net exports).
This also means that government surpluses which were strong>only were made possible by the household credit binge are untenable in this new (old) climate.
The Government needs to learn about these macroeconomic connections. It will learn the hard way as net exports weaken if it tries to impose austerity.
Real GDP growth and hours worked
Over the last several years, there has been the sharp dislocation between what is happening in the labour market and what the National Accounts data has been telling us.
Growth in employment and hours worked has been very modest over the period while annual real GDP growth has been around 3 per cent.
At those GDP growth rates, employment growth should be much stronger than it has been.
Today’s data shows that GDP per hour worked (productivity of labour) fell by 0.9 per cent in the September-quarter 2016 after rising by 1.3 per cent in the June-quarter 2016.
So even though real GDP fell by 0.5 per cent, the falling labour productivity was associated with a rise in hours worked (0.5 per cent).
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 September-quarter 2016.
You can see the major dislocation between the two measures that appeared in the middle of 2011 persisted throughout 2013 and has reasserted itself in recent quarters.
The GDP growth has driven by capital-intensive exports and more recently, capital infrastructure growth, which is one reason why labour productivity growth had been strong and employment growth weak.
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 September-quarter 2007 quarter to the September-quarter 2016. The horizontal blue line is the average annual growth since September-quarter 2007.
The relatively strong growth in labour productivity in 2012 and the mostly above average growth in 2013 and 2014 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 September-quarter 2016, annual labour productivity growth was down to 1 per cent (below the recent average of 1.3 per cent).
Remember that the National Accounts data is three months old – a rear-vision view of what has passed and to use it to predict trends is difficult
Today’s National Accounts data indicates that the Australian economy was in negative growth territory in the September-quarter and is marching inexorably towards recession under current policy settings.
The annual growth rate of 1.8 per cent is a distortion given the exceptional March-quarter 2016 result. The June-quarter result and today’s data suggests that Australia is probably already near recession if not actually enduring that state.
The strong export performance earlier in the year has not repeated even though the terms of trade improved in the September-quarter.
The external sector undermined growth in the September-quarter 2016.
Growth in domestic demand was relatively weak as a result of the continued decline in private investment expenditure and the subdued household consumption performance.
The weak private investment outcomes are undermining future prosperity.
The negative growth in private investment means that potential output in Australia and future growth rates will be lower than otherwise. Again, not a positive sign.
With domestic wages growth flat and household indebtedness at record levels, I don’t suspect a huge contribution from household consumption in the coming quarters.
Private investment is forecast to contract further.
So if the government sector persists in implementing its planned spending cuts then a recession will take us into the New Year.
And if that turns out to be the case, then incompetence is the only assessment of this government that would be valid.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.