Has Australia fallen into a per capita GDP recession?

Wed, 23 Jan 2019  |  

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/australia-fallen-recession-200014477.html

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Has Australia fallen into a per capita GDP recession?

 There is no doubt the Australian economy was weaker in late 2018 than it was during the first half of the year. It seems to have kicked off 2019 on a similarly weak note.

Recent economic news has been unambiguously poor and it follows the dismal GDP results released last month which showed per capita GDP falling 0.1 per cent in the September quarter. That was a poor result and forced most thinking economists to revise down their assessments of Australia’s economic health. If the upcoming December quarter GDP result, which is due for release in early March, reveals another drop in per capita GDP, the economy on a per capita basis will be going backwards.

This, quite clearly, is not good news.

It means living standards for the average Australian are falling and it poses questions about the current stance of economic policy.

In other words, with living standards falling, do policy makers have the right policies in place that will reverse this downturn and deliver a resumption in growth?

The short answer is ‘no’.

Policy settings are wrong for a scenario of stronger economy, including importantly per capita growth and a reflation of the economy. By way of background, the average annual rate of per capita GDP over the past 30 years have been 1.84 per cent or about 0.46 per cent per quarter. Population growth means that the long run trend growth for top-line GDP is over 3 per cent in annual terms and around 0.75 per cent on a quarterly basis.

Back to current economic conditions.

The data looks weak

The data flow for the December quarter looks weak, even with the population growing by about 0.4 per cent in the quarter.New car registrations are falling at an alarming rate and will mean both household consumption spending and business investment will be tilted to downside when the GDP data are published. Retail sales for both October and November were soft despite the Australian Bureau of Statistics noting that the November result was artificially inflated by the Black Friday sales. The stage is set for a low growth rate for household consumption spending in the December quarter.

What’s more, residential building approvals are in free fall which will undermine growth as new construction declines.

The monthly international trade for October and November suggests net exports trimming about 0.2 percentage points from December quarter GDP, as solid export growth is being outpaced by a pick-up in import growth. To be sure, there is still a run of information and data on some of the monthly indicators plus the quarterly data on government spending, business inventories, investment and household spending on services are to be revealed. These will all feed into the final December quarter GDP result and they may yet prove to be positive.

Even if these indicators surprise on the upside, per capita GDP in the December quarter will grow by 0.2 or 0.3 per cent.

If there is any disappointment in the remaining data flow, per capita could fall 0.2 or 0.3 per cent, meaning consecutive quarters of negative growth.

What next for our economy?

The markets will be awaiting each data point between now and the next GDP data with huge interest. Either way, there are serious questions about the current stance of economic policy.The market has gone from pricing in interest rate hikes a month ago, to now be squarely pricing in interest rate cuts, such is the obvious concern with the economy.

At this stage, there has been no word from the government about the need for any stimulatory fiscal policy action, in part because of the proximity of the election, which is due to be held by May.

It may be up to the new government, which ever side wins in May, to dust off fiscal policy and look for a bit of stimulatory fiscal policy to ensure the weakness evident in the second half of 2018 does not become entrenched through 2019 and into 2020.

It should also fall to the RBA to cut interest rates sooner rather than later to help support the increasingly troubled economy.

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The RBA admits it stuffed things up – sort of

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Not that the research explicitly says that, but the RBA Discussion Paper, Cost-benefit Analysis of Leaning Against the Wind, written by Trent Saunders and Peter Tulip, makes the powerful conclusion that by keeping monetary policy tighter in order to “lean against” the risk of a financial crisis, there was a cost to the economy that is three to eight times larger than the benefit of minimising the risk of such a crisis eventuating.

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A few terms first.

According to the Saunders/Tulip research, “leaning against the wind”, a term widely used in central banking, is “the policy of setting interest rates higher than a narrow interpretation of a central bank’s macroeconomic objectives would warrant due to concerns about financial instability”. In the RBA’s case, the “narrow interpretation” of the RBA’s objectives are the 2 to 3 per cent inflation target and full employment.

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The weak economy is turning higher

In the space of a couple of months, the rhetoric on the economy has gone from strong to weak.

Curiously, both assessments are wrong.

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It is not clear what has caused this error of judgment and the about face from so many commentators and economists, including importantly the Reserve Bank. A level-headed, unbiased look at economic data confirms that in late 2018 and the first half of 2019, the economy was in trouble. There were three straight quarters of falling GDP per capita, house prices were diving at an alarming rate, there was a rise in unemployment, wages growth remained tepid and low inflation persisted.

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