On the conventional measure, Australia’s economic growth in the year to June was just 2 per cent; in the June quarter, it was a very modest 0.2 per cent. At current prices, that’s the lowest year’s growth since 1961–62 – and if you can remember that, you’re probably a lot older than you want to be.
When the news hit the markets, the dollar plunged below US70 cents. But are the figures really as bad as all that?
No: large parts of Australia, including such out-of-the-way places as Sydney and Melbourne, are actually doing quite well. Where output is crashing, above all, is in the construction of new mines, gas fields and associated facilities in remote parts of Queensland and Western Australia.
Just as the growth figures gave us a misleading picture during the mining boom of how the mainstream Australian economy was faring – when in fact it was being hammered by the high dollar – these figures understate how much mainstream economic activity is returning now that the dollar is back around its long-term average levels.
First, a boring technical note. The conventional seasonally adjusted measures are not the best ones to use, because they bump around as a result of measurement problems. The Bureau of Statistics tells us to use its trend measure, which smooths out those bumps. This time that doesn’t make much difference – trend growth for the year to June was 2.2 per cent – but as it is a better measure, the figures cited here are trend figures.
The Bureau measures GDP in three different ways, tracking spending, production and incomes and then averaging them out. The spending measure is the most fun to look at, because it tells you what households, governments and businesses are doing. The Bureau sums all that up in a measure called domestic final demand, then adds exports and changes in business inventories, and deducts imports, to work out GDP.
Domestic demand is a pretty good measure, and it looks even worse than GDP: it grew by just 1.2 per cent last year, on top of growth of just 0.9 per cent the year before, and 0.8 per cent the year before that. With population growth averaging 1.5 per cent a year over that time, those figures look sick. Spending per head was flat last year, and is down 1.6 per cent over the past three years.
But suppose we divide domestic demand into two parts: engineering construction and everything else. Engineering construction is the story of the mining boom: it grew by an incredible 128 per cent in just two and a half years between early 2010 and late 2012 – and has slumped back by a third since then, falling 21 per cent last year alone. So the mining investment boom has bust, as the wiser economists always said it would.
But how about everything else we spend money on? Our spending on Everything Else grew just 1 per cent in 2012–13, but accelerated to 1.8 per cent in 2013–14, and then to 2.6 per cent in 2014–15. In the first six months of 2015, it was growing at an annualised rate of 3.4 per cent. Is that evidence of a weak economy? Don’t think so!
What is pushing it along? Consumer spending makes up a bit over half of it, and it’s kept growing at a decent clip: 2.6 per cent in the past year. The apartment building boom is certainly doing its bit: new housing investment is up 15 per cent year-on-year in the June quarter. Basically, we’re now building four new homes for every three we built in 2012.
Then there is a surprise source of growth: the Abbott government. Having abandoned any serious attempt to get the budget back into surplus, the government has increased its own-purpose spending by 4.7 per cent over the past year (excluding its transfers to us and the states), the Bureau estimates, on a combination of defence equipment, infrastructure and routine activities. It also estimates that taxes grew just 3.6 per cent in the same period, and on its preliminary estimate the 2014–15 budget deficit was $38.1 billion, only marginally less than the $39.9 billion run up in 2013–14.
But the big source of growth in Australia today is exports, which grew by 5.3 per cent in volume over the past twelve months. And while the slump in coal and iron ore prices means mining companies are getting less for what they sell, the lower dollar means other industries are getting much more – and the pressures of an overpriced economy have eased remarkably.
Take tourism. Tourism Research Australia reports that after the years of stagnation when the high dollar priced us out of global markets, the number of overseas visitors increased 7 per cent in 2014–15, and the amount they spent increased 10 per cent. And while there was a welcome rebound in tourists heading to depressed tropical north Queensland, the big winner was Melbourne, where visitor nights and total spending alike swelled 16 per cent year on year.
Take agriculture. Rural exports in the first half of 2015 grew 4 per cent in volume from a year earlier, but 10 per cent in value. Or services: the total value of services exports shot up 7.4 per cent in the first half of this year, and the value of all those professional, financial and business services exported swelled 10.5 per cent. All that money comes back into the community.
Take manufacturing, which had been flattened by the high dollar. The Bureau estimates that after manufacturing output had shrunk for fourteen quarters in a row, it is now growing for the first time since 2011. Manufactured exports in the first half of 2015 grew just 2 per cent in volume, but 9 per cent in value, thanks to the dollar’s fall.
Most startling of all are the Bureau’s estimates of growth in demand in each state. Its table now shows Victoria at the top of the growth ladder, with total spending in the state up 3.9 per cent year on year in the June quarter (and that’s in volume, not value). It was followed by New South Wales (2.6 per cent), South Australia (1.7), and a limping Tasmania (0.5), while the mining investment bust sent demand falling by 2.4 per cent in Queensland and 2.6 per cent in Western Australia.
There is still a lot of water to flow against our bridge. Mining investment still has a long way to fall, and that will have some impact in the rest of the economy. The car industry will still close over the next year or two. China’s bubble of excessive investment has burst, and that too will drag us back. And some day, some federal government is going to have to get serious about economic reform and fiscal repair.
Even so, when you look closely at these figures, they show the economy is in much better shape than we had thought. The real problem was always the high dollar; it just took policy-makers a long time to realise it. Now it is gone, and the economy is flowing again. It helps explain why jobs have grown so much in recent months. And it helps explain why the Reserve Bank sees no need to cut interest rates again. •