The weakness of the Australian economy

Wed, 03 Dec 2014  |  

Today's national accounts confirmed that the Australian economy grew by 2.7 per cent over the past year – not great, not horrible – but it continued the broad trend evident for the last 6 years or so where the economy is, on average, undershooting its potential.

It just has not been able to lock in a period of above trend growth to offset the periods of below trend growth.

This shows up when we look at the average pace of GDP growth since the middle of 2008. Over that time, real GDP growth has averaged just 2.5 per cent – effectively where we are now.

All credible economists know that given productivity growth, demographics and the like, Australia's long run potential GDP growth rate is about 3.2 per cent. This means that on average, over the past 6 years, the Australian economy has been growing too slowly.

And each quarter the economy grows too slowly, opening up is what we economists call an 'output gap' which gets wider and wider with each period of sub-trend expansion.

Perhaps the most obvious example of where this output gap is showing up is in the unemployment rate and the employment to population ratios.

In the immediate period prior to the move to a slower rate of economic expansion, the unemployment rate was 4.0 per cent and the employment to population was 62.8 per cent. Currently the unemployment rate is 6.2 per cent and the employment ratio is 60.5 per cent. These are huge changes.

If we are even to get half way back to the pre-crisis levels in terms of reducing spare capacity, employment growth needs to lift sharply and the only way that can happen is a sharp lift in GDP growth. My front of the envelope calculations suggest that two years of 4 per cent real GDP growth would get the unemployment rate down to around 4.75 per cent and the employment to population ratio around 62 per cent.

Clearly, with the terms of trade in free fall and the global economy muddling along, it is just about impossible to see a scenario where GDP growth will approach 3.5 per cent, let alone 4 per cent, any time soon.

And this is particularly the case with the RBA keeping interest rates well above those of the rest of the world and the government still hell bent, it seems, it trying to get the budget towards surplus.

All of which means a couple of things. Inflation will be very low into 2015 and we are likely to see the unemployment rate hit 6.75 per cent. It will also mean the RBA will certainly have a rethink on its policy settings and lower interest rates are likely to be delivered in 2015.

Interestingly, we may even see Treasury starting to tell Treasurer Mr Hockey that there is more to life, make that much more to life, that achieving a budget surplus. Indeed, the new Treasury Secretary should use the opportunity of the recent economic news to give Mr Hockey a lesson that the budget is the policy lever that can be used to manage the business cycle rather than the budget being the objective when tax hikes and spending cuts are considered.

comments powered by Disqus



Wed, 29 Jul 2020



Covid19 has opened a door for Australians to positively accept significant changes that will lead to a shared good. This rare opportunity enables us to achieve sustainable economic and social goals that create a new ‘normal’ as our way of life.

These Ten Steps are presented as non-partisan recommendations to the Australian Parliament in the firm belief that, if they embrace them, the Australian economy and society will be greatly enhanced after the Covid19 pandemic has passed.

*A job for you if you want one.
A significant increase in part time and casual employment can be created that will enable you to enjoy a more creative and peaceful lifestyle and to live longer and better. The traditional age at which you would have been expected to retire will become obsolete as a result. An access age for pension and superannuation will become your choice. This will enable you to remain in paid work for as long as you want to, on a basis that you choose, while boosting the productivity and growth of Australia.

*You will get wage increases that will be greater than your cost of living.
A demand for enhanced innovative skills at all levels of employment will be created as the economy grows in strength, thereby enhancing your stature in the workforce and enabling executive salaries and bonuses to drop to levels that are accepted as justifiable by employees, shareholders and customers.

The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link:   


The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced.