Last week, the Australian Bureau of Statistics released economic growth data for the three months to 31 March. Seasonally adjusted economic growth came in at 1%, or 4% annualised. That’s robust growth.
‘Real net national disposable income’ (which takes into account commodity price movements) increased a whopping 1.9% for the quarter, or 7.6% annualised.
Yet, the Reserve Bank continues to hold the official cash rate at 1.5%. What’s going on? Is this as good as it gets for the Aussie economy?
To answer that question, let’s have a look at where the growth came from in the March quarter.
Government spending was the biggest contributor to domestic growth, accounting for 30% of the quarterly total. Household spending made up 20%, and investment spending 10%. Net exports were strong, accounting for 40% of growth. In other words, there was a reasonably broad contribution from different parts of the economy, if a slight over-reliance on government spending and exports.
Still, that’s not much to complain about. Add in rising commodity prices and the terms of trade jumped by 3.3% for the quarter. This fed into the very strong real net national disposable income growth, which is the best broad measure of Australia’s economic performance.
Which brings me back to my earlier question. With growth so robust, why is the Reserve Bank not increasing interest rates? I mean, with annualised quarterly growth running at 4% or 7.6%, or a whopping 8.8% in nominal terms, why are official rates anchored at all-time lows of 1.5%?
The official answer is that inflation is not a threat. And the reason for that is because wages aren’t rising enough to put upward pressure on inflation.
If that is the case, it seems to me that the economy has some structural issues. Thanks to a near decade long housing and debt boom, the household sector is now burdened with an excessive debt load. This has a number of implications…
Large debt levels increase economic insecurity. People are probably more likely to stay in their job and not agitate for a pay rise, knowing their salary is crucial to managing an oversized mortgage. Why risk it by asking for more?
And because a greater portion of wages go towards debt repayment (in additional to higher petrol and energy costs), there is less discretionary spending. This leads to lower employment growth.
Don’t get me wrong, employment growth has been strong in Australia. But we are also getting a steady supply of labour via immigration. So while demand for labour is healthy, so is the supply, and this contributes to a lack of wages pressure.
If you take population growth into account, you’ll note the economic growth stats aren’t quite as impressive. GDP growth per capita for the March quarter came in at 0.7%, or 2.8% annualised. And over the last 12 months it’s up just 1.5%.
Real net national disposable income per capita increased 1.5% in the March quarter, or 6% annualised, but is only up 0.9% over the 12 months to 31 March.
You might think the answer to the wages problem is to cut immigration, but that would be wrong. Lower population growth would mean lower demand, which would in turn impact employment growth.
In my view, which is just a guess, an economy that is largely driven by debt accumulation isn’t one that adds a huge amount of value and therefore isn’t one that can deliver increasing rewards to labour.
Australia’s post crisis growth model centres on commodities, which are capital heavy and labour light, as well as housing. The housing economy consists of construction and lower skilled services around facilitating changes in home ownership. These are not high skilled, high wage jobs.
The other reason why the RBA isn’t budging on interest rates is because they probably feel that this is as good as it gets. They know they can’t rely on government spending and net export growth to keeping delivering.
And with inflation and wages growth subdued, they can afford to keep sitting on their hands for months to come. Their focus is on the highly indebted consumer. Household final consumption expenditure was just 0.3% in the March quarter, or 1.2% annualised.
Until the household sector comes back to life, the RBA will be pretty much happy to do nothing, regardless of where the headline economic growth rate comes in.
Until next week,
Editor, Crisis & Opportunity