Wednesday, September 06, 2017

GDP. We're spending more without earning more

Household spending is growing faster than household income, and has been for five quarters; the longest unsupported boom in spending since before the global financial crisis.

The steady increase in spending, funded by a steady decline in saving, has propelled economic growth to 0.8 per cent in the June quarter and a better than budgeted than 1.9 per cent in 2016-17, a result Treasurer Scott Morrison said showed the "better times ahead" forecast in the budget were beginning to emerge.

Australia's household saving ratio fell to 4.6 per cent in June, down from 8.7 per cent when the Coalition took office in 2013. Mr Morrison defended the slide saving saying it was a sign of improving confidence.

"It's how people see things out over the next 12 months, two years and so on and how they see things moving," Mr Morrison said. "There's undoubtedly lots of volatility in the global economy but the global economic position, as we've been saying now since the beginning of the year, has been improving and that's a positive thing. It's not surprising that households, families, businesses will reflect that in a lot of their own decisions and the actions that they're taking in the economy."

Wages and salaries grew just 0.7 per cent in the three months to June and by only 2.1 per cent over the year, an increase driven by a jump in the number of hours worked rather than pay increases.

Average compensation of employees (a broad measure of wages) declined 0.1 per cent in the quarter, and climbed just 0.1 over the year.

Real net national disposable income per capita, the best measure of potential living standards, slipped 1.4 per cent, in the first decline in six quarters.

National Australia Bank chief economist Alan Oster said household spending dropped at the end of the quarter in June and also looked to be weak in July.

While the increase in the minimum wage from July 1 would help, rising energy prices, high debt levels and the removal of penalty rates should weigh on spending.


Mr Morrison said a substantial lift in wages would have to wait until a sustained improvement in profits. The national accounts measure of profits climbed 19.5 per cent over the year in response the higher minerals prices, but slipped 4 per cent in the three months to June.

"There's no chicken and egg conundrum when it comes to wages and profitability in investment," Mr Morrison said. "What has to come first is companies have to make money to be able to pay more in higher wages. You can't get a pay rise in a business that isn't making any money, and you can't get a job in a business that's shut."

"We are seeing more people getting into work and that's a good thing, and that's the precursor always to seeing wages move. The precursor is also an increase in investment and an increase in profitability and we're seeing all of those measures heading in the right direction, and so long as we continue to make decisions and choices that push all of those indicators in that direction, then we can expect to see that flow through."

Labor Treasury spokesman Chris Bowen said without government investment – driven largely by the new Royal Adelaide hospital – and government consumption, the growth number would have been flat.

"It's ironic that we have the Turnbull Government trying to whip up fear of socialism while it relies on public spending to prop up the June quarter growth figures."

Victoria was by far the best-performing state, recording population-fueled growth in state final demand of 1.3 per cent in the June quarter and 4.7 per cent over the year. State final demand in NSW grew only by 1 per cent and 2.4 per cent.

Victorian Treasurer Tim Pallas acknowledged the role of population but Victorian spending was growing at almost twice the rate of Victoria's population. "Population growth not only brings economic activity, but it also brings demands on the state to make investments in infrastructure and provide services," he said. "The business sector is doing just as much of the heavy lifting and consumer confidence is growing in a virtuous cycle."

Demand in Western Australia went backwards, sliding 0.3 per cent over the quarter and 4.3 per cent over the year. Dem and in the ACT slipped 0.2 per cent in the quarter and grew 1.3 per cent over the year.

The national accounts show next to no growth in housing investment, suggesting homebuilding has peaked, and that the fall will weaken future economic growth.

New business investment climbed 1.1 per cent in the quarter and 1.5 per cent through the year, producing the first year growth since the Coalition took office in 2013 .

In The Age and Sydney Morning Herald