02 June 2016
by Jacob Greber

Exports deliver headline GDP surge but living standards under pressure

Sluggish business investment, falling profits and faltering wages growth have overshadowed a surge in export-driven economic growth as the most sustained squeeze on national income on record heads towards an unprecedented fourth year.

In a stark display of the divergent forces driving the economy, official figures showed gross domestic product rose by an annual 3.1 per cent in the first three months of 2016, the strongest annual growth in 3 1/2 years.

At the same time they confirmed that living standards shrank 2.6 per cent in the 15th straight quarter of falling or stagnant real net national disposable income per capita.

Both sides of politics seized on the contradictory figures as underscoring the economy's vulnerabilities, with Prime Minister Malcolm Turnbull warning there was still "plenty of risk out there on the horizon", including Labor's opposition to the corporate tax cuts at the heart of the Coalition's election pitch to boost the economy.

"They seek to raise taxes on investment, which will have the obvious consequences of less investment and fewer jobs," Mr Turnbull said.

Shadow Treasurer Chris Bowen hit back, saying the figures confirmed the Coalition's record on growth was "nothing to boast about".

"Beneath the headline figures, we know that there is an economy struggling with falling demand and falling income growth," Mr Bowen said.

Benefits spreading
The national accounts confirmed exports continue to keep the economy afloat, and there are signs the benefits are spreading as the transition away from resources gathers steam, particularly across high-employment sectors such as tourism, which helped drive a respectable gain in consumption.

However for many businesses and households the outlook remains clouded and hinges on commodity prices, China and whether wages can recover from the weakest pace on record.

For the first time in 16 years, the Australian Bureau of Statistics published a negative so-called domestic demand deflator, "official" confirmation of a lack of price pressures across the economy, which keeps open the door open to further potential Reserve Bank of Australia interest rate cuts.

"Growth close to trend that's generating more jobs is an excellent outcome for a nation at the tail end of a resources boom," said Chris Richardson, the Deloitte Access Economics budget economist. "Equally, incomes remain under pressure – so we might be producing more and getting those jobs, but living standards are still falling and the federal budget remains under pressure.

"They contain the same long-term message we've had for a while; if you want living standards to get better, you want politicians talking reform, and you genuinely want them to be talking about up-front pain for long-term gains, and that might be the money for tax cuts, competition policy or education."

The Australian dollar rallied sharply to as much as US72.99¢ after the national accounts showed quarterly GDP accelerated sharply from 0.7 per cent in the December quarter to 1.1 per cent, shattering expectations in financial markets and within the government for a gain closer to 0.8 per cent.

Exports accounted for almost all the growth in the period, adding 1 percentage point to the total. Households added the equivalent of another 0.4 of a percentage point, which was offset by a 0.5 percentage point detraction from non-dwelling construction and a 0.1 percentage point loss from equipment investment.

The figures confirmed that while the drag from falling mining investment is now at its most intense, wiping out almost 1.6 percentage points from the headline annual GDP gain, non-mining investment is also yet to fire after dropping 2 per cent in the first quarter.

Wages, when adjusted for inflation, were essentially flat over the year, rising a nominal 0.4 per cent in the quarter and 1.2 per cent from a year earlier, while consumers appear to have maintained their spending by dipping into savings.

Economist Saul Eslake estimates that since the September quarter of 2009, real GDP has grown at an average of 2.7 per cent a year. By contrast real net national disposable income - widely considered a proxy for living standards - grew between 2009 and 2011 an annual pace of 5.3 per cent, or almost double the average for real GDP. Since the terms of trade reached a zenith in the September quarter of 2011, living standards have contracted at an average annual pace of 1.4 per cent.

Not the full story
"The economy is doing OK, but GDP doesn't tell you the full story," Mr Eslake said. "It's easier to understand some of the other things that are going on - including weak profits, tentative consumers who are funding their spending through savings, and the difficulties governments have in balancing their budgets - are all ultimately traceable to the weakness in income."

The figures showed the economy's reliance on China is set to continue in coming quarters, with not enough growth being generated from non-mining investment.

However the numbers have increased speculation that the end of the resources boom should continue to unfold without a major setback, surge in unemployment, or the recession scenario that some economists feared several years ago.

​"This is what a soft landing from a mining boom feels like," said Paul Bloxhman, chief economist at HSBC. "More to the point, this is what a large fall in commodity prices and a rebalancing of growth towards the services sectors can do to the GDP numbers.

"Although overall GDP growth is strong, this is being driven by exports, which are not creating much inflation, yet."

Adam Boyton, an economist at Deutsche Bank said the main drivers of Reserve Bank and federal government fiscal policy would be more likely to be driven by developments in wages, productivity and inflation than headline real GDP figures.

"In this vein the weakness in the domestic demand deflator in the quarter with the first flat/negative outturn in 16 years provides further 'confirmation' of the lack of price pressure across the economy," he said. As a result, despite the better than expected headline GDP result, there was likely to be another two quarter-point interest rate cuts over the coming year, he said.