Just how strong is the economy? The easy answer is to look at GDP growth and suggest that while it can hide things and ignore others, it is generally a good guide. And as a rule, if GDP is growing strongly that is better than if it is not.
But what GDP growth figure should we look at? The annual growth of 5.9% is stonkingly good. It’s “a beautiful set of numbers” good.
And yet it is a mirage. The year-on-year growth figures are determined by the current quarter and the base quarter (ie the September quarter in 2021). And in the September quarter last year much of New South Wales and Victoria was in lockdown, and thus by comparison things look a lot better.
That brings us to the quarterly growth figures – up just 0.6%. That is decidedly tepid – it would translate to just 2.4% annual growth, which is well below average.
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So at the moment the economy is just paddling along, and it would seem that we need to search hard for good things to say.
One very pleasing and, to be honest, extremely surprising occurrence, given what was assumed two years ago, is that the economy is back at the size you would have expected it to be before the pandemic hit:
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That is an unprecedented recovery from a recession, and highlights that the pandemic recession was unlike any other. But it does have some lessons for governments in the future: stimulus works, use wage subsidies like jobkeeper to keep people attached to the labour force, and raise the rate of jobseeker (this later aspect is of course something that should be done now, and not just during a recession).
So that’s the good news. Now let’s now see what is going on under the hood of the economy.
Firstly, household spending is still powering the economy, but less so than in the past:
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Take away household spending and the economy didn’t grow at all in the September quarter, and barely at all over the past year.
Pretty much all the spending growth in July, August and September came in services. Things are back open for business – especially hospitality and crucially, transport services:
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More than half of the increase in household consumption came from hospitality and transports services.
That is very good news, given those are labour dominated sectors, but it is going to be interesting to see if that is sustainable.
One thing that has been driving household spending over the past 18 months has been the level of savings many could draw on because they were unable to spend during lockdowns.
But that is over. In September the household saving ratio was almost below the pre-pandemic median:
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Now that the savings boost is gone, we need household income and wages to power spending.
And the positive here is that compensation of employees rose 10% over the year, and was up 3.2% in the September quarter alone.
That is extremely pleasing, and it means wages are finally starting to generate some growth in the economy rather than it being all about profits. But don’t worry, profits still rose 15.6% over the past year:
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We need to be a bit careful, however, about suggesting the wage growth problems are over.
The average earnings per non-farm employee rose 4.7% over the past year and the average earnings per hour worked rose 3.1%. Both are good, but also well below the 7.3% inflation rate and the 6% growth of prices consumed by households.
It means when we look at average household disposable income per capita, things are going backwards:
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This is not surprising. Despite all the talk about wages getting a boost, it is clear they are not keeping up with inflation given real labour costs remain well below where they were before the pandemic, and 2.6% below where they were a year ago:
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It’s why you continue to hear the treasurer, Jim Chalmers, talk about the “pretty serious head winds coming at us from around the world”. The world economy is slowing and here in Australia interest rates keep going up – another 25 basis points this week.
The Reserve Bank of Australia continues to believe it needs to raise rates to quell inflation, and yet, as with the CPI figures, the prices within the national accounts show that much of the big rises are in areas that the RBA has little influence over – imports, vehicles, electricity and gas, and dwelling construction (which relies on imported materials).
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One area the RBA’s decisions do affect is house prices. In the national accounts, the cost of transferring ownership (things like commissions to agents, fees to lawyers and stamp duty) is a good proxy for house prices. On this score, the RBA has had a strong impact – it grew just 4.2% over the past year, well down on the 22% growth earlier in the year.
And so we have a slowing economy, but a central bank still slamming its foot on the brake even while the main area of spending the RBA can influence has already greatly slowed.
It makes for a concerning time ahead as people hope that the rate rises are still about slowing strong inflation and not just slowing a weak economy.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
