The rate of Australia’s economic growth coming in at 3% in the year to December surprised even the most optimistic of forecasters.
The most bullish forecasts in a Bloomberg survey last week predicted a rate of 2.9%. And that was from just two banks out of 28!
Economists from everywhere gave the data a big tick yesterday. But Deutsche Bank’s Australian economist Adam Boyton was more circumspect about the bigger picture in a note to clients. Here’s Boyton, our emphasis added in bold:
However, there is a ‘problem’ with this economy – namely the weak productivity (GDP per hour worked fell 0.3% over the year) and wages growth that are required to reconcile employment and GDP growth. Combine that with the decline in the terms of trade (-3.2% qoq/-12.0% yoy) and the associated weakness in nominal GDP growth (0.4% qoq/2.4% yoy); and our living standards measure (see chart) shows a fourth consecutive year of decline. Of course, there is little Australian policy makers can do about the slump in the terms of trade. However, unless you think Australia is at the global productivity frontier (and we don’t), then the productivity part of this equation (and hence the future path of potential growth) is still a matter of choice.
It is not, however, a choice for monetary policy – a point the RBA Governor has made repeatedly. Indeed, in his own words: “This is a point where I am a broken record, but this is the point we have made many times. It cannot really be the case that we get long-run growth by just using monetary policy which, in the end, borrows from tomorrow’s income to spend today. That cannot be a recipe for sustained, strong long-run growth. The sustained and strong long-run growth in living standards comes from innovation, risk taking, productivity et cetera et cetera”. Staying with the RBA, with GDP growth over the year to the December quarter at 3.0% versus the RBA’s February SMP forecast of 2½%, we see no reason to change our view that the cash rate will remain at 2.0% for some time.
Here’s the chart he’s referring to:
The recent trend is clear.
“Living standards” are one of those unhelpful economic euphemisms. It sounds like it’s all about nice cars and holidays to Phuket, but it’s really about the ability of a country to attract investment, keep talent, build great schools, look after the sick, give people control over their income, and have a strong social safety net for people on the margins.
And living standards in Australia are declining right now, and have been for some time, because all those jobs being created and extra hours being worked simply aren’t as productive as in the past.
It’s not a crisis. Australia’s living standards are still the envy of the world and not about to disintegrate, even if growth was to slow dramatically, because of the wealth amassed over the last 25 years. But there are problems, and tackling them requires investment and risks by businesses and – more pointedly in an election year – policy solutions from politicians on economic reform.