Is Australia facing a lost decade in living standards?
The latest GDP figures show just how quickly things can turn, and how the lack of economic growth going towards households means that, should the economy continue to soften, we are likely to experience a lost decade in household living standards.
Three months ago, things were not looking too bad on a national level. The economy had grown by 3.4% in the previous 12 months – well above the average. But the ABS giveth and the ABS taketh away. The Bureau of Statistics has now revised its figures using updated data from the 2016-17 financial year. The good news is the economy was growing stronger in 2016-17 than we previously believed; the bad news is the economy is growing slower now than we thought:
It’s not all bad – the current trend GDP growth of 3.0% is still solid, even if the seasonally adjusted growth figure of 2.8% shows a sharp slowing:
This slowing is rather concerning, especially if the seasonally adjusted figures suggest a turning of the corner. The seasonally adjusted quarterly growth of just 0.25% was the second-worst since 2011. And even worse is the fact that GDP per capita actually fell in seasonally adjusted terms:
The growth was rather below expectations, and certainly below what the Reserve Bank was expecting when it made its decision on Tuesday to keep interest rates on hold.
The RBA noted then that “the Australian economy is performing well. The central scenario is for GDP growth to average around 3½ per cent over this year and next, before slowing in 2020”.
For GDP to grow this year at 3.5%, we would need to see growth in the December quarter alone reach 1.2% – a level that has occurred only once in the past 10 years.
The past year has again seen households keep the economy buoyant – with a strong assist from net exports and government spending:
But while household spending remains the strongest contributor to our economic growth, it is clear this is due to households reducing their level of saving rather than through an increase in spending due to incomes rising.
The annual growth of household consumption fell in the past quarter to just 2.5% - well below the 25-year average:
And the spending growth (little that it is) is clearly coming from our reducing the amount we are saving. In September, the household saving ratio was just 2.6% – the lowest for over a decade:
And there is certainly little sign that people are reducing the level of the saving because they are so upbeat about the economy. An outsized proportion of the increase in household spending went to food and insurance – together they contributed to 42% of the total increase in household spending in the September quarter.
What we are definitely not spending money on is cars.
In the past 12 months our purchase of vehicles has fallen by 2% – the worst growth since the GFC. If the purchase of big-ticket items is a good indicator of how households are really feeling, then our decision to hold off on buying a car is not a sign that things are particularly rosy right now:
And it is not surprising that households are not feeling in the mood to splash out on a new car, because the proportion of national income going to employees remains at near 50-year lows:
This is because the amount of income going to company profits is far out-pacing that going to wages and salaries. In the past year, the gross operating surplus of corporations (a proxy for company profits) grew by 7.1%, well above the 4.3% for the compensation of employees.
Last year, when profits were growing by a jaw-dropping 20% while the level going to employees was barely growing above 2%, the reasoning was that it takes a while for profits to flow through to wages and that a better guide is to look at a longer-term level of profit growth – such as a three-year average.
While that did seem to paint a fairer picture, it is clear now that even using this measure, profits are far outpacing wages. And while the growth of profits is increasing, the annual growth of income going to employees is actually falling:
The reason it is falling is that the very strong employment growth of 2017 has slackened off, and at the same time there has not been a pick-up in wages growth.
In the past 12 months the growth in the average compensation per employee grew by a pathetic 1.2%, down from 1.7% in March.
Given that in the past year inflation grew by 1.9%, it means that in September the real average compensation per employee went backwards:
In real terms, the average compensation per employee is at 2010 levels, and so too is the real gross disposable household income per capita:
It means that, even during a period of extremely strong employment growth, household living stan-
dards went backwards, and they are continuing to do so now that employment growth is slowing.
It begs the even more worrying question of where this leaves us should the economy itself begin to slow – especially if due to a shock from overseas.
The signs are actually not good that the buoyant world economy will continue. The trade dispute between the US and China is beginning to have serious impacts on the US stock market as investors finally twig to the reality that despite their loving his company tax cuts, the US president might be an idiot.
This week the bond yield (or interest rate) for US Treasury five-years bonds was lower than for three-year bonds. This is not supposed to happen. When the yield for longer-term bonds is lower than shorter ones, it means investors believe the economy is going to get worse, and it is a common indicator of a recession on the way.
The last time this occurred was prior to the GFC:
So we should not be too hopeful that everything will run smooth over the next few years. Australian households have not seen an improvement in living standards for eight years – nearly reached a decade of stagnation.
It begs the question that if households can’t get ahead when things are going well, what hope have they when things turn bad?
• Greg Jericho is a Guardian Australia columnist