SAUL ESLAKE: Here's Why This Week's GDP Will Won't Stop Unemployment Heading To 6.8%

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Bank of America Merrill Lynch’s chief economist Saul Eslake put out his forecast for this week’s Q3 Australian GDP and while he has a solid 0.8% for the quarter pencilled in, it came with a warning.

While that 0.8% takes year on year growth rate to 3.2%, Eslake says this level overstates Australia’s real level of growth within the economy because of the level of foreign ownership in the economy, especially ownership in mining.

Eslaks has a great explanation for why things feel weaker than the 3.2% would suggest:

Unlike most other ‘advanced’ economies, Australia is an exporter of commodities and an importer of manufactured goods. As a result, the prices of the items which comprise much of Australia’s trade are considerably more volatile than those of the items which other ‘advanced’ economies trade, or of those which Australia produces and uses itself (see Chart 8). This in turn means that, in the Australian context, the growth rate of real GDP – which by definition abstracts from movements in the prices of exports and imports (as well as the prices of goods and services produced for domestic use) – understates the growth of real incomes when the terms of trade are rising, and overstates it when the terms of trade are declining, as they have been since Q3 2011 and are expected to continue doing over at least the next two years.

Additionally, since the Australian resources sector is around 80% owned by foreigners, most of the income generated by rising resources exports accrues to non-residents. Again, real GDP – which measures the volume of goods and services produced within an economy’s borders – by definition does not capture the ‘leakage’ of income abroad and hence overstates the growth in real incomes available for spending within that economy when ‘net income payable overseas’ is rising at a faster rate than real GDP – as it will be in Australia over the next two years, as the resources sector completes the transition from the investment phase of the ‘boom’ that began over a decade ago to the production phase.

Hence we believe that investors should pay more attention to measures such as real gross domestic income (GDI) and real gross national income (GNI) as summary measures of Australian economic activity.

As shown in Chart 9 above, both real GDI and real GNI are expected to grow at significantly slower rates than real GDP over the next two years. Indeed, given that Australia’s population is expected to continue growing at around 1¾% pa, our forecasts imply that real GDI and real GNI will decline in per capita terms in 2014
and 2015.

All of which means that, “we expect domestic spending – other than on housing – to remain relatively soft at least through 2015,” Eslake said.

As a result, he is forecasting unemployment to hit 6.7% in 2015 and 6.8% in 2016.

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