Malcolm Turnbull may have boosted confidence, but his economic honeymoon may be short-lived

Political opinion polls and consumer sentiment data in Australia may have surged in the fortnight since Malcolm Turnbull became prime minister, but the lighter mood may be underestimating the seriousness of the economic challenges facing the country.

That’s the view presented by global asset manager AllianceBernstein who, in a research note released today, suggests the honeymoon for Turnbull may be quite short, given the sobering economic environment dictating Australian households and business.

Guy Bruten, the group’s senior economist for the Asia Pacific, believes a reliance upon GDP as a measure of economic welfare, something that he describes as a “flawed metric”, doesn’t really reflect what has been happening to the Australian economy in recent years.

“In our view, the GDP figures don’t really reflect what’s been going on in the Australian economy since 2011, when the commodities boom ended and our unusually favourable terms of trade—in which the prices we received for our exports were far in excess of what we paid for imports—began to fade”, says Bruten.

“During that period, GDP slowed from 3.7% to 2.5% which, while lower, was hardly shabby. If you look a little deeper than GDP allows you to, however, the picture looks a lot more serious.”

In his opinion, rather than focusing on GDP growth, a better measure on the true state of Australian living standards is derived from using net national disposable income per capita (NNDIPC), which adjusts for shifts in terms of trade, population growth, net flows of income to overseas.

“From the end of 1992 until the Lehman Brothers shock in September 2008, growth in household disposable income per person averaged a remarkable 3.2% a year, with very little volatility. The first half of the period reflects the payoff from the economic reforms of the 1980s, while the second half reflects the China-driven commodity price boom”, he notes.

“But that era is now clearly over. Since the end of 2011, this measure of living standards has been going backwards at a rate of 1.4% a year — a reflection, largely, of the decline in the terms of trade.”

The decline in Australian NNDIPC is revealed in the chart below. It is broken down into three distinct eras: the struggle, ranging from 1980 through to 1992; with the the party, a prolonged period between 1992 through to 2011 that encompasses the twin mining booms along with the hangover, beginning from 2011 through to today in which NNDIPC has declined, albeit from lofty levels.

The OECD agrees with Bruten’s assessment, noting that while GDP is the single most important indicator to capture economic activity, it is not a good measure of societies’ well-being and only a limited measure of people’s material living standards.

Bruten describes the prospect of a reversal in NNDIPC next year as “slim”, suggesting Australia’s economic transition from mining investment-led growth to export and consumption-led growth still has some way to go.

“Our baseline scenario says that solutions to Australia’s problems will require both innovation and time, and it remains to be seen whether Mr Turnbull can shorten this process with his new approach to leadership”, notes Bruten.

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