Big GDP Numbers Mask Hard Economic Realities

Seasonally adjusted Gross Domestic Product (GDP) was 3.3% in the year-ended June 2016, well above expectations and in many respects, unfortunately masking some very hard economic realities. The starting point for any analysis of GDP is the factors that contributed to it. While exports added 2.0% and household consumption supplied 1.5% of the growth, infrastructure expenditure by governments added most of a 0.7% contribution from general government expenditure. That may be one-off expenditure, but the impact is important, thanks to plummeting business investment.

As the chart below shows, the major detractor from GDP – in fact the only one for the year-ended June 2016 – was business investment. Bad enough that in the prior year, business investment dragged GDP back by 1.0%, but for the most recent year, it detracted 1.8% from full-year GDP.

Fig 1

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Had any of the other factors not been present, Australia’s GDP would have looked decidedly sluggish, thanks almost entirely to the detracting contribution of business investment.

There was no particular surprise in the further stumbling of business investment. Since it peaked in 2013, it has been declining progressively since, as the chart below shows.

fig 2

As Callam Pickering wrote in CP Economics in early September:

Business investment remains dreadful, falling by 5.7 per cent in the June quarter, and we can expect to see another 10 to 15 per cent decline during the 2016-17 financial year. The weakness continues to be concentrated in non-residential construction, which fell by a whopping 12.4 per cent in the June quarter. Machinery & equipment investment rose by 1.0 per cent in the quarter.”

So it is clear where the business investment problem lies and equally clear that the malaise in non-residential construction is set to continue over the next year.

Although they are not directly linked, the contribution of general government investment in the year to the end of June has effectively stood in for business investment, at least with respect to GDP.

In all of this concern about underlying weakness in the Australian economy and a kind of failure to invest in the infrastructure required to move up a gear, there was some good news. 

Real Gross Domestic Income (GDI) rose by 0.9% in the June quarter, its strongest quarterly result of the last three years.

This is welcome news because it points to the prospect that in an economy that is closing in on full employment (notwithstanding the underemployment issue addressed in the previous edition of Statistics Count), more is being earned from the national effort.

To put this in context whilst GDP has continued to grow this has not shown up in expanding national income because our terms of trade (the value of what we earn from the rest of the world) has been declining. As you can see from the chart below the June quarter has seen a good increase in income and a strong increase in the terms of trade.


Its difficult to know how much GDI can improve further without domestic demand growing more strongly. Again, as Pickering put it:

“Domestic demand remains pretty weak by historical standards and that continues to weigh on inflation and full-time employment growth.”

That weakness is flowing through into soft retail sales – see the next item in Statistics Count – which is itself dragging on GDP and income generation.

There is a line through the latest GDP data that indicates the structure of the Australian economy is relatively weak. Low unemployment, low inflation, low wages growth, poor retail sales, lousy business investment and most growth coming from non-structural activities, all points to an economy too fixated on external income, with too little emphasis on the powerful drivers of productivity.

Time, perhaps, to start being a little bit worried about consumption driven business models.