The latest Australian GDP figures are a prime example of the great divergence of major economic indicators and the reality that most people feel after strong economic growth in the December quarter last year failed to translate into growth for workers’ wages.
Australian Treasurer Scott Morrison would have breathed a small sigh of relief when the figures were released by the Australian Bureau of Statistics on Wednesday. While there was little expectation that the figures would be bad, had the economy gone backward in the quarter Australia would have been in a “technical recession” (that most silly of phrases) given the September quarter last year saw the economy shrink 0.5 percent.
The December quarterly growth of 1.1 percent in seasonally adjusted terms was well above expectations and enabled Morrison to talk of how “Australia is growing faster than every G7 economy.”
Illustration: Louise Ting
And certainly 1.1 percent quarterly growth is very strong, but before we turn up the music and start dancing in wild celebration, we should have a closer look, and a deep breath.
First, a big reason for the strong growth is because the figure is a comparison with the September quarter: December looks good purely because September was so bad.
It is why the trend and seasonally adjusted figures tell rather different stories. In trend terms, the economy grew just 0.3 percent in the December quarter.
In the annual figures — which enable us to do more than just compare one bad quarter with one good one — we see the picture is pretty uninspiring.
In seasonally adjusted terms, the economy grew by 2.4 percent last year, well below the long-term average and in trend terms it grew by just 1.9 percent, which is actually the worst annual growth since during the Global Financial Crisis (GFC).
Thus the story Morrison is able to tell is due quite a bit to the convention that we report the seasonally adjusted figure as the big number rather than the trend figure.
Seasonally adjusted figures can be a bit weird at times and not completely reflective of the true state of the economy.
In the December quarter the big contributions to growth were household consumption, exports and public investment: The public investment was due to spending on the second National Broadcasting Network satellite, as well as defense aircraft procurements.
The growth of exports is not unexpected, but again shows the erratic nature of seasonally adjusted figures, given the past two quarters saw net exports detract from growth: The growth in household spending is a bit odd given that in the December quarter the big driver was on luxury type items, such as household furnishings and recreation and culture.
However, the annual figures are more understandable — rent, insurance and health being the big drivers of household spending. And while consumption remains a key component of our economic growth it remains well down on the levels the occurred prior to the GFC.
A closer look at the national accounts explains why, because the real story of the GDP figures is how nominal growth has taken off and how wages have not.
Nominal GDP grew by 3 percent in the December quarter alone — the strongest increase in one quarter since June 2010.
The annual growth of 6.1 percent in seasonally adjusted terms and 5.2 percent in trend terms is the best for more than five years.
The strong nominal GDP growth would bring a big smile to the treasurer given nominal GDP is a better guide for tax revenue than is real GDP — because taxes are paid at current currency rates, not dollars minus inflation.
The big driver of the nominal growth was increases in Australian export prices, such as for iron ore and coal. The terms of trade in the December quarter grew by 9.1 percent in seasonally adjusted terms — the third biggest quarterly jump in the past 40 years. Even the trend growth of 6 percent is historically huge.
However, workers are not feeling the benefits. Because the growth is driven by export prices rather than through domestic demand, a great disconnect has occurred.
While nominal GDP growth grew by the strongest level for seven years, wages and salaries actually went down 0.5 percent on a seasonally adjusted basis — the biggest quarterly fall since 1993. Even the trend growth of 0.2 percent is the lowest recorded outside of the GFC and the 1990s recession.
That is not meant to happen. Usually when nominal GDP grows, so too do wages and salaries — but not at the moment.
Over the past 30 years the relationship between nominal GDP and earnings has been very strong. On average when nominal GDP has grown over a year by 5.2 percent, then wages and salaries should grow by about 5 percent rather than the current rate of 1.8 percent.
It is indicative of the truly woeful wages growth Australian’s are experiencing — a growth that is out of whack with the state of the economy.
There is, for example, usually a strong connection between the unemployment rate and wages growth (known as the Phillips curve). Generally as the unemployment rate falls, the growth of wages rises because there is more demand for workers and so employers have to pay more to keep workers and attract new ones.
However, right now the relationship has utterly broken down. Over the past 20 years, an unemployment rate of 5.7 percent — that Australia currently has — would be associated with wages growing by about 3.4 percent; instead wages (as defined by the wages price index) are growing by a record low of just 1.9 percent.
There is bugger all reason for business groups to be complaining about industrial relations at the moment — especially in light of the penalty rates decision.
In historical terms workers are the ones who are missing out. This is highlighted by the labor cost figures in the national accounts. Real unit labor costs last year fell by 4.2 percent in seasonally adjusted terms — the biggest annual fall ever recorded. In real terms, the cost of labor is now lower than it ever has been.
The big number in the GDP figures might suggest things are improving, but what the numbers really highlight is that things are not as strong as the erratic quarterly growth figure would suggest, and that workers are more than ever before missing out on the benefits of the growth that does exist.
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