Last week saw the release of Australia’s economic growth figures for the three months to 30 June. Given they’re already over two months old, the figures don’t have a huge bearing on the Aussie market. As you know, the market looks ahead, not backwards.
But there is an aspect of the data that wasn’t touched on last week. And it’s an important one for you to understand. The ‘feeling’ of the Australian economy will make more sense once you see this point.
Firstly, let’s look at the headline numbers:
Economic growth for the three months to 30 June came in at 0.8%, or just 1.8% annualised. That’s pretty weak. You’re not going to see a strong pick up in labour or wages (and therefore interest rates) while the Australian economy is struggling along at these levels.
A broader measure of Australia’s economic performance is known as ‘real net national disposable income’. It includes the effect of the ‘terms of trade’ on the economy. When the world pays higher prices for our commodities (and we pay the same price for imports) our terms of trade rises and it provides a boost for the economy.
The terms of trade fell by 6% in the June quarter, meaning our real net national disposable income fell by 1%.
BHP’s share price is not a bad proxy for the effects of the terms of trade on the Australian economy. As you can see in the chart below, BHP’s share price spent the June quarter correcting, thanks to a commodity price correction.
It’s since rebounded, which tells you the terms of trade will likely rebound in the September quarter too.
As an aside, it’s worth pointing out that BHP’s share price might be due for a correction here. As you can see below, it’s rallied all the way back to the highs reached in January but has failed to push through. That increases the chances you’ll see a correction unfold in the next few weeks.
[Click to enlarge]
Anyway, getting back to the Australian economy. Because the terms of trade have rebounded strongly in the year to 30 June (up 14.9%) real net national disposable income increased a very healthy 4% over the year.
So broadly measured, the Australian economy was quite strong last year, thanks to a rebound in commodity prices and the increase in national income that that brings.
But that’s only part of the story.
The other, hidden part, takes into account the effects of population growth.
The key drivers of economic performance are population growth and productivity growth. For years, Australia’s politicians have happily driven a pro-population growth agenda.
When your population grows, so does demand for housing, credit, food, and services like insurance and banking. It’s an easy option to generate economic growth.
But when you adjust for population growth, Australia’s economic performance doesn’t look as good.
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For example, GDP per capita only grew 0.2% in the year to June. In other words, per head of population, Australia’s living standards barely grew last year.
So if you feel like you’re treading water, you are.
On the productivity front, it’s worse. Hours worked in the year to June increased 2.5%, but GDP per hour worked actually fell 0.5%. So we’re working more, but getting less for it.
Productivity growth, or the lack of it, is one of the great mysteries of the Australian economy. No one really knows how to improve it in practice. In theory, it’s easy. Invest in plant and equipment that lowers costs and generates more output.
Sounds easy. But why doesn’t it work out like that?
Tax incentives are one reason. And Australia provides a good example.
Australia’s tax system overwhelmingly favours pouring capital into property. That’s why property prices are so high, for both residential and commercial property.
As I mentioned last week, Australia now has over $1 trillion in foreign debt. Most of that borrowed money goes towards the purchase of real estate.
Now, I would argue that there comes a point where pumping more capital into land doesn’t improve productivity. And if you invest in your property on a scale like ‘The Block’, I would argue that it actually detracts from productivity.
I mean, how fancy does your bathroom have to be?
Having denser housing close to the CBD is a good thing, in that people can be closer to work and not waste time commuting. But wouldn’t it be even more efficient to remove stamp duty so people can move closer to work if need be, without penalising them with a moving tax like stamp duty?
Of course it would. But state governments are addicted to the revenues that stamp duty brings in. They will never give it up, even if it makes economic sense.
The bottom line is that Australia’s underlying economy (ignoring the fluctuations of commodity prices) is weak. That’s thanks to a huge amount of consumer debt that has gone towards pushing property prices sky high.
We’re working more hours to pay off the debt, but getting less for it (on a per capita basis).
To keep headline growth respectable, politicians play the immigration/population growth card. But they ignore the productivity card, because it’s all too hard.
Thankfully, commodity prices are on the up again, masking these problems for the time being. But they won’t go away. When the next downturn hits, Australia will suffer a very nasty recession.
Head of Research, Port Phillip Publishing