Australian National Accounts – continued weakness and highly vulnerable to recession

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.

The main features of the National Accounts release for the December-quarter 2019 were (seasonally adjusted):

• Real GDP increased by 0.5 per cent for the quarter – signalling continued weakness. The annual growth rate was 2.2 per cent, well below historical trend of between 3.25 and 3.5 per cent.
• Real GDP per capita growth was 0.2 per cent.
• The main positive contributors to real GDP growth was Household Consumption (0.2 points), Inventory accumulation (0.2 points), Government consumption (0.1 points) and Net exports (0.1 points).
• The main negative contributor was Private Capital Formation (0.2 points).
• Australia’s Terms of Trade (seasonally adjusted) fell by 5.3 per cent in the quarter and 0.6 per cent over the 12 month period.
• Real net national disposable income, which is a broader measure of change in national economic well-being fell by 0.9 per cent for the quarter but rose by 2.7 per cent for the 12 months to the December-quarter 2019, which means that Australians are better off (on average) than they were at that point 12 months ago, but worse off than they were in the September-quarter. These swings are being driven by the fluctuating terms of trade – the usual story for Australia.
• The Household saving ratio (from disposable income) fell by 1.2 per cent to 3.6 per cent. The saving ratio is still well below the levels that were observed following the GFC.

Overall growth picture poor

The ABS – Press Release – said that:

The Australian economy grew 0.5 per cent in seasonally adjusted chain volume terms in the December quarter 2019 and 2.2 per cent through the year

… the rate of growth remains below the long run average.”

Domestic demand remained subdued with 0.1 per cent growth in the December quarter. A pick up in household discretionary spending and continued increases in the provision of government services was dampened by falls in dwelling and private business investment …

Falling prices for key export commodities impacted the terms of trade in the December quarter, which fell 5.3 per cent …

Real net national disposable income declined 0.9 per cent. “Fluctuations in commodity prices have significant effects on the Australian economy in terms of export revenues and real income,

The first graph shows the quarterly growth over the last five years (with the red line being the ABS moving average trend). The trend growth is now flat.

I predict the trend will start pointing downwards as the coronavirus impact starts moving into the data.

To put this into historical context, the next graph shows the decade average annual real GDP growth rate since the 1960s (the horizontal red line is the average for the entire period (3.4 per cent) from the March-quarter 1960 to the December-quarter 2019).

It is easy to see how far below historical trends the growth performance of the last 2 decades have been as the fiscal surplus obsession has intensified on both sides of politics.

Even with a massive household credit binge and a one-in-a-hundred-years mining boom that was pushed by stratospheric movements in our terms of trade, our real GDP growth has declined substantially below the long-term performance.

And it is not that we are eschewing material aspirations in favour of climate action. Our carbon emissions continue to rise as well.

Analysis of Expenditure Components

The following graph shows the quarterly percentage growth for the major expenditure components in real terms for the December-quarter 2019 (grey bars) and the June-quarter 2018 (blue bars).

Points to note:

1. The overall growth performance is being driven by the strength of Household Consumption (as the Saving ratio declines again) and Export expenditures.

2. The decline in Import expenditure (-0.53 per cent) is a sign of weakness.

3. Private investment expenditure growth declined by 1.15 per cent for the quarter. It has declined every quarter since the March-quarter 2018. It declined by 3.4 per cent over the 12 months.

4. Household consumption expenditure growth was steady over the year by increased over the quarter from 0.14 per cent to 0.4 per cent. Overall, it remains subdued compared to recent years.

5. The growth in exports has virtually ended (0.01 per cent) as the terms of trade decline. I predicted that the recent surge in exports driven by the impact of the environmental problems in Brazil would not be long-lived. The coronavirus will also impact severely in the coming quarter – particularly in terms of tourism and foreign student income.

6. Public investment decline by 0.4 per cent for the quarter as the big public infrastructure projects (State government – large transport projects mainly) start to reach fruition.

Contributions to growth

What components of expenditure added to and subtracted from the 0.4 per cent real GDP growth in the December-quarter 2019?

The following bar graph shows the contributions to real GDP growth (in percentage points) for the main expenditure categories. It compares the December-quarter 2019 contributions (blue bars) with the June-quarter 2018 (gray bars).

In order of contribution:

1. Household consumption expenditure contributed 0.2 points to the overall growth result – a relatively weak but stable result.

2. Growth in inventories contributed 0.2 points. This is related to firms stockpiling.

3. Net exports added 0.1 percentage points driven by falling imports.

4. Public consumption contributed 0.1 points. Overall, the government sector contributed 0.1 points (given the zero contribution from public capital formation).

5. Private investment expenditure undermined growth by 0.2 points (negative 0.2 points last quarter).

Material living standards fall in December-quarter 2019

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) grew by 0.5 per cent in the December-quarter 2019, real net national disposable income growth fell by 0.9 per cent.

Over the 12 months to the December-quarter 2019, Real net national disposable income grew by 2.7 per cent, which means that Australians were better off (on average) in real income terms than they were twelve months prior but poorer than they were in the September-quarter.

This is mostly due to the terms of trade effect rather than domestic demand growth.

The following graph shows the evolution of the quarterly growth rates for the two series since the December-quarter 2006.

Household saving ratio rises – as households save the tax cuts

The saving ratio fell by 1.2 per cent to 3.6 per cent.

Ultimately, the credit-fuelled and draw down on saving cannot be sustained. The impacts of the coronavirus (lost income) will clearly exacerbate the tension households have been facing with flat income growth for several years.

So it will be recession or the government will dramatically shift its policy mentality.

The following graph shows the household saving ratio (% of disposable income) from the December-quarter 1960 to the current period.

In the December-quarter 2008, the ratio was 10.9 per cent having risen sharply in the early days of the GFC as households tried to stabilise the record debt situation.

Once the GFC threat was contained by the massive fiscal stimulus, the saving ratio began to fall again, especially as the squeeze on wages has intensified.

In the December-quarter 2016, the household saving ratio was 5.5 per cent (still much lower than historical norms).

The following table shows the impact of the neoliberal era on household saving. These patterns are replicated around the world and expose our economies to the threat of financial crises much more than in pre-neoliberal decades.

Period	Average Household Saving Ratio (% of disposable income)
1960s	14.3
1970s	16.1
1980s	12.0
1990s	5.4
2000s	2.2
2010-	6.4

Real GDP growth and hours worked

The following graph presents quarterly growth rates in real GDP and hours worked using the National Accounts data for the last five years to the December-quarter 2019.

You can see the dislocation between the two measures over the period to mid-2016 (it actually began in 2011). In other words, GDP was growing while hours worked growth was variable but often zero or negative.

From then until the December-quarter 2018, the two series moved more or less together, despite the blip in the December-quarter 2018.

But the December-quarter data shows that growth in total hours worked lagged behind GDP growth, which means that productivity growth rose quite strongly (0.4 per cent).

To see the above graph from a different perspective, the next graph shows the annual growth in GDP per hour worked (labour productivity) from the December-quarter 2008 quarter to the December-quarter 2019. The horizontal red line is the average annual growth since December-quarter 2008, which itself is an understated measure of the long-term trend growth of around 1.5 per cent per annum.

The relatively strong growth in labour productivity in 2012 and the mostly above average growth in 2013 and 2014 helps explain why employment growth was lagging given the real GDP growth. Growth in labour productivity means that for each output level less labour is required.

In the December-quarter 2019, annual labour productivity growth rose by 0.4 per cent.

Conclusion

Remember that the National Accounts data is three months old – a rear-vision view – of what has passed and to use it to predict future trends is not straightforward.

Economic growth remains weak in Australia and I expect it will weaken further, and probably go into a recessed state unless there is a major shift in macroeconomic policy.

I will write separately about the impact of the coronavirus and how government can offset those impacts.

But the interest rate cut yesterday will do nothing much. A large fiscal stimulus is required with significant cash payments to those losing income.

I doubt the Federal government will be able to do that. It will offer some stimulus soon but probably not enough.

The Australian economy is being hit with cumulative effects of drought, bushfires, floods and now the virus. That is not the time to be pursuing a fiscal surplus.

Combining all the signals, the conclusion is that the Australian economy is stagnating and in danger of fall off a cliff.

The National Accounts data indicates that the Australian economy continued to perform poorly in the December-quarter, a trend that has now persisted for the last 12 months.

Annual growth is just 2.2 per cent well below the historical trend rate of between 3.25 and 3.5 per cent.

The weakness is exemplified by slackness in private domestic demand – weak household consumption growth and negative business investment growth.

The continuing contraction in business investment will also undermine potential GDP growth, locking the economy into a high labour underutilisation state.

The contribution of Net exports was positive but only because import expenditure fell sharply – another sign of weakness.

Overall, the Australian growth outlook remains poor.

A major shift in fiscal policy towards expansion is definitely required – now and big.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.