03 September 2015
by Jacob Greber
Economy Hits The Brakes
Income squeeze worsens as economic decay continues
The economy narrowly missed shrinking for the first time in more than four years last quarter after a spike in government spending - including on defence - helped cushion the most sustained slump in national income since the early 1990s recession.
Fewer exports, weak investment and falling profits cut gross domestic product growth to an anaemic 0.2 per cent in the June quarter from 0.9 per cent three months prior. The 2 per cent annual growth rate was the 12th straight quarter of below-average performance, the Australian Bureau of Statistics figures showed on Wednesday.
Analysts warned that faltering growth would continue this financial year, with global financial markets unleashing a fresh wave of turmoil that could hit demand for Australian iron ore, coal and gas.
The terms of trade, which measures export prices compared with import prices, fell 10.6 per cent over the financial year, the biggest declines on record since at least the late 1950s and the primary reason that Australians' income is falling.
"The key take-out is just how perilous things are now," said Stephen Anthony, an economist and federal budget expert. "We're falling off the mining investment cliff and that's occurring at a time of incredible instability on financial markets. That has to be negative for real output growth."
The worse-than-expected growth rate sent the dollar below US70¢ for the first time since the aftermath in 2009 of the global financial crisis. Financial markets are pricing in a 91 per cent chance of another cut in official interest rates by the Reserve Bank of Australia this year.
The weakest growth since the Abbott government took office almost two years ago represent a political blow for Treasurer Joe Hockey, who ridiculed three months ago as "clowns" commentators who warned that Australia's economy was weaker than headline first quarter GDP figures suggested.
Mr Hockey compared Australia with countries doing worse, including New Zealand, with growth of just 0.1 per cent in the March quarter, and Canada, which is in a recession. However, Australia's growth in the quarter was half of Germany's, one quarter of Greece's and a fifth of what was recorded in Spain.
The slowdown reinforces warnings from economists at last week's National Reform Summit that Australia is in danger of sleepwalking into a major downturn.
Janine Dixon, an economist at Victoria University who cast doubt over the government's long-term forecasts for a return to budget surpluses by early next decade at the summit, said Australia's growth rate was disheartening.
"GDP is growing, albeit slowly, but incomes are going down - that just shows you we're not getting much return for our effort," she said.
Mr Hockey shrugged off the deterioration in the GDP figures, saying they had had been affected by one-off factors such as a drop in mining shipments and bad weather at ports, with bright spots including household spending and an improving services sector.
"The fact is that the economic growth we had in the last quarter was in line with expectations," he said. "Of course it bounces from quarter to quarter."
"The transition away from a reliance on mining investment is well underway."
Writing in The Australian Financial Review on Thursday, shadow treasurer Chris Bowen describes the data as a "huge embarrassment" for Mr Hockey "given his antics after last quarter's results.
"When the March national accounts were released back in June, the Treasurer huffed and puffed, telling us all that we were one of the fastest growing economies amongst our developed nation peers, that his Government was "lifting the tide".
"Making matters worse, growth would have been negative if it hadn't been due to a spike in government spending. Yes, this is not a typo. The economy under Hockey and Abbott would have gone backwards if it wasn't due to higher public spending. I'm sure I don't need to spell out the irony here."
Government spending rose 4 per cent in the quarter, contributing the equivalent of 0.4 of a percentage point to GDP, while exports detracted 0.7 of a percentage point from the headline figure. Inventories wiped out another 0.2 of a percentage point.
Public demand excluding asset sales jumped 2.7 per cent to $8.7 billion, with defence accounting for around 30 per cent of that after the government shelled out $1 billion for two extra C-17 transport aircraft, two Airbus re-fuelling aircraft for $400 million, a $900 million defence communication system, a $325 million anti-rocket system and the ongoing $125 million- to $120 million cost of the Iraq and Syrian mission, according to ministerial announcements since March.
The weak figures also underscored what some economists have described as an "income recession," as was first reported last year by The Australian Financial Review.
Real net disposable income per capita, one of the broadest measures of living standards as it effectively encompasses what the nation, its governments, companies and workers earn - fell in the three months through June for the fifth straight quarter, by 1.2 per to a five-year low of $13,084.
Annual growth per capita income growth of 2.3 per cent was the weakest since March 2010, a period that was still suffering from the latent impacts of the global financial crisis.
Nominal growth of 1.8 per cent in 2014-15 was the weakest since 1961-62, the ABS said, something economists said was due to the fact that inflation was far higher in the 1970s, 80s and 90s, even though there were severe recessions during that era that saw jobless rates jump far higher than anything currently being experienced.
"It's a longer income squeeze than we saw in the recession of the early 1990s," said Deloitte Access Economics expert Chris Richardson. "Our Catch-22 is that when our pie is shrinking, that's when you need reform the most but it's also when reforms are hardest to achieve.
"We should have done the hard yards on reform when we had income coming out of our ears because China was handing us income on a platter."
Andrew Charlton, co-founder of Sydney and Singapore consultancy alphabeta, said the national accounts showed the promised smooth transition away from mining isn't happening.
"Today's data indicate that Australia is set for a longer, tougher road back to growth."
With the Australian dollar almost 25 per cent lower than a year ago, living standards in international terms have fallen almost 18 per cent, Dr Charlton estimates.
Mr Anthony, who works for Industry Super Australia, said there is an urgent need for Australian governments to start preparing the ground to deliver a fresh wave of well chosen infrastructure projects for the nation's weakest growth regions.
"Right now would be a very good time for some sort of infrastructure statement where government considered all the options it has. What we're seeing is a downturn and the question is haw far down that takes us.
"Remembering the lesson of the GFC, which is don't hit the economy with the answer for the previous downturn. Try to diagnose this in the context of today's circumstances, and right now that's an insufficiency of aggregate demand, income growth and a significant shortfall of infrastructure investment."
The national accounts did include some positives, with accommodation and food services relatively strong, suggesting the lower dollar has boosted the competitiveness of the tourism sector.
Dr Dixon warned that the outlook for multi-factor productivity growth - regarded as the primary driver of living standards in the absence of a sudden surge in commodity prices - remains "really weak."
"We're not getting any free kicks from anywhere. Right through to 2011 productivity hardly mattered, because the terms of trade helped us along. Now that's backed off, it's exposed our weakness."