The big guns of Australian economics are out in force at the moment suggesting that Australian growth is not as strong as the headline GDP suggests and that the RBA might be erring by keeping rates at 2.5%.
Professor Ross Garnaut’s entreaty for the RBA to cut rates because the “whole economy” needs lower rates has been echoed by bank of America Merrill Lynch Australia’s Chief Economist Saul Eslake whos said in a note to clients that the GDP data “isn’t telling us all we need to know” about the health of the economy.
Eslake says that a number of factors are combining to render GDP redundant as a true measure of Australia’s economic health.
Australia has experienced a series of sharp swings in its ‘terms of trade’ (the ratio of export prices to import prices) over the past decade, as commodity prices have risen, fallen (during the financial crisis), recovered, and (over the last three years) declined again. Real GDP doesn’t capture the effects of these swings: but another measure known as real gross domestic income or GDI does capture them. Real GDI grew a lot faster than real GDP between 2002 and 2008, and again between 2009 and 2011; but it fell a lot more than GDP during the financial crisis. And it has grown a lot more slowly than real GDP since 2011.
Eslake says that “GDP will be even less relevant from now on” because:
As the ‘resources boom’ moves into its third and final phase – with resources investment winding down and exports ramping up – real GDP growth will be an even less useful guide to what’s happening to domestic income and employment. That isn’t just because Australia’s terms of trade will continue to decline, important though that is. It’s also because a large share of the income generated by resources exports will be paid to foreigners (who financed most of the investment phase of the ‘boom’); and because depreciation on the enlarged capital stock which is the result of all that investment will absorb a greater share of gross income.
He goes further and says that two new measures – gross national income (GNI), which subtracts net income payable overseas from GDI, and real net national disposable income or NNDI, which subtracts depreciation and net transfers overseas from GNI – are more relevant measures to understand what is happening within the Australian domestic economy.
“Followers of the Australian economy will need to become more familiar with these measures in order to get a more complete picture of what’s going on ‘down under’”, Eslake said.
It all stacks up to an economy in transition, slowly experiencing domestic growth that is materially weaker than the headline 3.1% year on year rate reported last week for the year to June 30 2014.