If you were to sum up the Australian economy in 2017 using just one chart, Paul Bloxham, Chief Australia and New Zealand Economist at HSBC, reckons this would be it.
It shows real and nominal GDP growth on an annualised basis going back to 2000.
While real GDP, measured in volume terms, currently sits around trend — a level where it inflationary pressures are generally stable — nominal GDP, capturing both volumes and price changes over the year, has been growing strongly, rising to the highest level since Australia’s mining boom earlier this decade.
Bloxham says the lift in nominal GDP means that the story of this year has been all about “nominal reflation”.
“The real economy kept growing at around its trend rate, but the nominal economy picked up pace after years of weakness. The driver was rising commodity prices,” he says.
“The headwind from falling commodity prices became a tailwind in 2017 and started to re-inflate the economy. Mining profitability rose and this, along with increased spending on infrastructure, boosted the profitability other sectors and tax revenues.”
While that acted to boost business confidence, as seen in various PMI reports and the NAB’s monthly business surveys this year, the improvement in the nominal economy — the one in which we all live in — was not felt by households to the same degree, helping to explain why consumer confidence remain subdued.
To Bloxham, this largely reflects a lag effect from previous weakness in the Australian economy.
“We all spend and earn in a nominal world, so we feel less wealthy when the nominal economy is sluggish,” he says.
“Squeezed margins force businesses to seek ways to cut costs [in prior years], which included giving smaller and fewer wages rises. It also weighed on our ability to consume and on corporates ability and willingness to invest and hire.”
However, those headwinds started to dissipate this year. Non-mining corporate investment began to pickup and employment growth surged, culminating in close to 400,000 Australians finding work in the year to November, the second-fastest annual increase on record.
Given those trends, Bloxham expects the strength in the nominal economy will be far more noticeable to households in the year ahead.
“We expect the return to solid nominal GDP growth — which we expect to continue in 2018 — and buoyant business conditions will continue to support jobs growth and that the tightening labour market will start to deliver some modest growth in wages,” he says.
“The boost to wages and jobs growth should lift household incomes and, in turn, support a modest pick-up in consumer spending.”
Should Bloxham be on the money, he says that will add a bit of upward pressure to inflation, an outcome that he predicts will see the Reserve Bank of Australia (RBA) begin to lift interest rates.
“We expect the RBA will deem that their current record low cash setting may not be needed,” he says, adding that the RBA will “start a slow and steady hiking cycle in 2018”.
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