Another economist is out questioning the strength in the Australian economy implied by last week’s GDP data.
Peter Jolly, NAB’s global head of research, has released a report saying that “Only Statisticians live in the ‘real’ economy”.
While the real economy grew 3.1% over the past year, only a touch under the past two decades’ average of 3.3%, most “feel” the economy is not that great. I’d agree that the vibe doesn’t feel around long term averages and I expect the answer for this lies in the difference between real and nominal GDP, as well as what’s happening to household income – not a lot it turns out.
The closely followed “real” GDP is basically a measure of volumes once we’ve stripped out what’s happening to prices. But what’s happening to prices as well as volumes matters for businesses when they measure their profitability, pay tax, and think about investment in new equipment or hiring decisions.
During Q2 the nominal GDP did nada. Volumes grew 0.5% but prices fell 0.5%. A key price group that fell was commodities, with Australia’s overall terms of trade down 4.1% in Q2 and down 7.9% in the year to June.
Chart 1 illustrates the softness in the “nominal” economy and employment, where we all live, versus the robustness in the “real” economy inside the Government Statisticians spreadsheet.
Putting numbers on it, in the year to June 2014 real GDP grew 3.1%, nominal GDP 3.3% (near half the two decade average of 6.3%), and employment grew 0.9% (also half the two decade average of 2%). By contrast, in the year to June 2008, real GDP grew 2.9%, nominal GDP grew a staggering 9.1%, and employment grew 3.0% – stronger than real GDP…
The net of all this is that yes, the real economy has grown a healthy 3.1% over the past year. This is close to the two (decade) average and we expect it will continue to grow around this pace in the year(s) ahead. But with prices for our exports falling, company profits and household incomes are not growing anywhere near as strongly as they once did. Neither is employment. So yes, if it doesn’t feel great you’re probably right.