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Is the Australian economy in trouble?

Is the Australian economy in trouble? Source: Getty Images

You may have heard the term ‘GDP per capita recession’ used in recent weeks.

Let me give it to you straight: there is no such thing as a GDP per capita recession. You won’t find it in any economics text books and it’s certainly not used by most economists.

It’s being used now, by some corners, to highlight how hard it’s become for many Australians to get ahead.

Since federation Australia has used population growth to turbo-charge the economy – and, on many occasions, it’s worked – the problem we’re having now is that economic growth isn’t keeping pace with population growth.

It’s a bit like musical chairs. More people have joined the party, and are playing the game, but not as many chairs are being added.

But is that the full story of the economy as its stand now? Not quite.

Ahead of the election, let’s have a look at whether the economy is, or isn’t, performing well… because both major parties will give you differing views on this.

Hopefully it will make you a more informed voter.

GDP growth – whatever that is

GDP growth is a strange concept – especially when you consider how much we rely on it to work out how well we’re doing as a country, meanwhile many people couldn’t tell you what it means and how it’s put together.

In simple terms, it measures the output of a country (gross domestic product). The thinking is that the more we produce and consume, the happier we will be. Equally, it’s thought that if produce and consume less, in any given year (recession), we are unhappy.

In the final three months of 2018, Australia produced and consumed more, but only a little bit more. GDP growth was 0.2 per cent. Of course, any slower than that and the economy is at risk of going backwards.

Consumer spending

Part of the problem the economy is facing is that fewer shoppers are parting with their cash.

There’s a myriad of things holding them back: low wage growth; higher cost of living (especially utilities bills and child care); as well as elevated levels of personal debt.

The thinking is, if you’ve got a permanent full-time job, and you’ve got some wiggle room on your mortgage repayments or rent, you’re all good, but if you’re worried about losing your job, you’re only going to spend money on the basic essentials.

Consumer spending makes us roughly 60 per cent of economic growth, so, yes, when people ‘tighten their purse strings’, as the saying goes, the economy slows. And that’s a problem.

Business and exports

Business appears to have shrugged off the impact of a cooling economy with a stronger-than-expected surge in investment towards the end of last year.

Private sector capital investment, or capex (capital expenditure), for the three months to the end of the year, rose by 2 per cent, a solid rebound from a disappointing fall in the third quarter.

Companies also produced record profits in the half year.

That’s the good news. The bad news is that profits outside the mining sector were broadly flat in the quarter, indicative of a rather sluggish economy.

The country also sucked up more imports and actually pulled back on the export front (still big numbers buy slightly less big numbers).

Australia has always done well on exports, and there are fears, once the latest LNG export boom is over, we won’t be such an exporting powerhouse any more.

Government

The government, and its spending, is the final missing piece of the GDP puzzle.

It won’t surprise you to know that government spending helped boost GDP growth this time around.

Now, mind you, that is a good thing. It would be a strange government that didn’t build roads and bridges as a means of employing people and giving everyone a higher standard of living.

The idea though is that the resulting economic growth is meant to spread throughout the economy, or at least provide a bit of a boost to confidence… but… it’s not.

Standards of living

So there you have it. The economy is not in recession, it’s not even in a GDP per capita recession, because there’s no such thing, but it is slowing.

In fact it is slowing a lot faster than what many people were anticipating.

Ahead of the up-coming federal election, both sides of politics will need to convince voters that they’ve got a handle on the economy.

But is that even possible?

You’ve got a housing market that could go anywhere: up, down, sideways or crash; resistance from business to increase wages; a preference for the creation of gig, or insecure work; and goodness knows how Brexit or the US-China trade war will play out.

I actually think the Australian economy is performing precisely how everyone is feeling right now: a little hesitant.

@DaveTaylorNews

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