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Don't Pop The Champagne Over Today's Positive GDP Figures

Lurking in the numbers are several signs that Australia's broader economic trajectory is still rather shaky.

01/03/2017 3:48 PM AEDT | Updated 01/03/2017 3:48 PM AEDT
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"Scott Morrison no doubt heaved a big sigh of relief over the ABS's latest report on Australia's economic growth, covering the last three months of 2016."

Malcolm Turnbull and Scott Morrison no doubt heaved a big sigh of relief over the ABS's latest report on Australia's economic growth, covering the last three months of 2016.

The previous report had been dismal: a decline of 0.5 in inflation-adjusted GDP for the September quarter. Another negative result would have qualified as Australia's first official recession (defined as two consecutive quarters of GDP contraction) in over 25 years -- catastrophic for an already-struggling government.

But they didn't need to worry. Economic output in the December quarter grew by 1.1 percent -- fully offsetting the previous quarter's loss, and then some.

Turnbull's team is celebrating the result as evidence that their economic plan is working. From the government's perspective, even better news was the very strong growth in nominal GDP, powered by a big rebound in global prices for iron, coal, and other commodity exports. It is nominal GDP (not inflation-adjusted real GDP) that drives tax revenues, and it soared almost 3 percent in the quarter. This rebound in nominal price levels will allow the government to reset its fiscal projections, knocking billions off projected future deficits.

But before anyone pops too many champagne corks over these results, we should pause to take a second, sober look at the details. Lurking in the numbers are several signs that Australia's broader economic trajectory is still rather shaky. For example, December's growth was heavily concentrated in mining and commodities exports. But we've learned many times that where commodities are concerned, what goes up, must come down -- so we can't count on this latest boom to last for long.

Construction, meanwhile, shrank in the quarter; combined with other indicators that new building approvals are falling, this hints that the building boom (so important to recent growth) may have peaked.

But the biggest cause for worry in the new GDP numbers is growing evidence of a startling reallocation of total income -- away from workers, in favour of businesses.

But the biggest cause for worry in the new GDP numbers is growing evidence of a startling reallocation of total income -- away from workers, in favour of businesses. Because of this redistribution, bigger GDP does not translate into better household living standards. Moreover, the decline in labour incomes bodes ill for future trends in consumer spending, and hence threatens future growth.

Total wages and salaries paid out to Australian workers actually fell 0.5 percent during the December quarter -- and that was before adjusting for inflation. That was the worst quarterly contraction in labour incomes since 1994. The decline reflects a brutal combination of weak job-creation, ubiquitous part-time work, and record-low wage increases.

Even including non-labour forms of income, nominal household revenues hardly grew. Yet, curiously, stronger consumer spending still constituted the single biggest component of the GDP expansion. How can consumers spend more when their real incomes are falling?

New profits have been concentrated in mining, which is heavily foreign-owned. Therefore, much of the new profit is diverted offshore: it "counts" in Australia's GDP, but may never set foot on Australian soil.

Only by borrowing, which Australian families continue to do in spades. Household debt now exceeds 130 percent of national GDP. And household savings are the lowest since the global financial crisis in 2008. In the long run, consumers can't keep spending faster than their incomes are growing.

At the other end of town, a greater share of the total pie is going to the business sector. Gross profits of non-financial corporations surged 16.5 percent in the quarter -- the strongest profit result since June 1975. Higher minerals prices are driving an enormous expansion of corporate profits. But companies are not reinvesting those profits: of the nearly $11 billion in new profits pocketed by business in the December quarter, just $1 billion was pumped back into new business investment (including construction, machinery, and research).

What happened to the rest?

New profits have been concentrated in mining, which is heavily foreign-owned. Therefore, much of the new profit is diverted offshore: it "counts" in Australia's GDP, but may never set foot on Australian soil.

Billions more are paid out in dividends. Credit Suisse researchers recently predicted corporate dividend payouts would set an all-time record of $72 billion in this fiscal year, driven by the gap between surging profits and stagnant investment. Some excess cash is simply hoarded: non-financial companies sit on swelling piles of financial assets, waiting to decide what to do with all their money (but reluctant to invest it).

In any event, not enough of these record business profits are being reinvested in Australia's economy. That puts a significant and ongoing damper on aggregate demand. Billions of dollars in spending power leak from the economic system each quarter, undermining spending and incomes, and hurting future growth.

Given the continuing stagnation of their wages and incomes, most families will see little in the GDP numbers to cheer about. And the irony is that recent policy decisions -- from lower penalty rates for Sunday work, to the government's fixation on lower taxes for businesses -- can only make this lopsided distribution of GDP all the worse.


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