Blockbuster GDP Growth Has its Darker Side

Annualised June Quarter economic growth for Australia was a very strong 3.4%, with quarterly growth at 0.9%. All of the major contributors to growth were headed in the right direction over the year, but the big issue hanging over future growth is poor wages growth and the capacity of households to contribute to future growth.

Starting with the headlines, the chart below shows that annualised GDP growth (the red line) is at its highest in six years. The annualised strength aside, there is, as the monthly blue bars show, still some inconsistency on a quarter-by-quarter basis.


To go straight to the dashboard and take a closer look at the data, click here.

Below the main headlines, the topics of interest start with the contributions to economic growth. The significant contributing factors over the last year are shown in the table below.


Factor Contribution to YE July GDP Growth
Household Consumption +1.4%
Exports +1.2%
Business Investment +0.9%
General Government +0.6%
Dwelling Construction +0.2%
Imports# -1.3%
Inventory* -0.4%
# increase in imports providing a negative contribution to GDP growth
*  means reduced production for the period and decline in GDP

There are positives in these contributions, including the solid contribution from households and the role of business investments are stand outs. On the latter however, a small number of large investments made up a lot of the contribution, rather than the investment being widespread.

Positive though most key measures were over the last year, the role of household consumption is key to the future of economic growth. It is also here where the greatest concerns exist, especially because of less than satisfactory wages growth over the last decade.

Although household consumption contributed to economic growth (through spending), at the same time, households experienced a declining savings ratio, as the chart below, from The Guardian’s Greg Jericho shows.


In June, households saved just 1.4% of their income in trend terms – the lowest level for a decade – and it marked, as Jericho points out, a record fourteenth consecutive quarter of the savings ratio falling.

So, at its simplest, instead of saving for a rainy day, Australians are spending as though that day will never come. With household savings ratios so low, the question is where will the next round of household fuelled consumption come from?

The only answer can be improved wages, and that’s a struggle right now. It is more of a struggle, as Jericho observes, because:

“While the annual growth of total compensation of 4.9% is as strong as we have seen for over six years, the annual growth of average compensation per employee of 1.7% is woefully low.”

The chart below shows this disparity in wages distribution.

fig11ver, the shares of total income going to employees is at more or less historic lows. Employees received 52.2% of total compensation in June, as the chart shows. There will be some who applaud this because they own capital, but for the majority, this is no good thing, and for the economy, it is a structural risk of a serious magnitude.


This data will also lead some to argue that this is all the fault of greedy corporations or poor public policy, but the data does not particularly support that. This is a global phenomenon that appears to have more to do with technology and its take up than it does with decisions of major corporations.

Recent research by economist Geoff Weir, reported in the Australian Financial Review suggests that within sectors of the economy, early adopters of disruptive technologies (think of automated law firms) have won market share ahead of later adopters. The ‘winners’ have less wages to pay because of the automation and the ‘losers’ cannot afford to pay higher wages because they are losing their market to the winners.

Either way, for the individuals concerned, and for the economy as a whole, this is an ‘ouch’ realisation that as Weir says, will become more pervasive as technologies are adopted more widely.

The upshot of this?

Treasury wages forecasts of 3.25% growth in 2019-20 ‘look too high’ according to Weir, impacting the entire economy and meaning that household expenditure growth and therefore economic growth will be constrained into the future.