Question

No economic disaster, but we are stuck in low gear

Prime Minister Scott Morrison's claim that this week's soft economic growth figures were "no surprise" is itself a bit, well, surprising.

If the government had such a strong inkling the Australian economy would endure a weak June quarter, why did it only really start softening up the public this week, in the days leading up to the national accounts?

Why didn't the April budget build more of this anticipated softness into its forecasts? And for that matter, if it was so well known that growth was trudging along at a sub-par pace of 1.4 per cent a year, why didn't the Reserve Bank of Australia foresee this weakness just last month?

For all the government's attempts to put a positive spin on the gross domestic product (GDP) figures this week — and there were plenty — it's hard to avoid the conclusion the numbers were weaker than the top economic officials had been predicting.

That's not intended to be an attack on their forecasting skills, nor is it a move to "talk down" the economy. It's an acknowledgement of facts.

To be clear, our economic position is not disastrous and it is also true we are heading into the 29th consecutive year of expansion. The economy is not shrinking, unlike how the United Kingdom, Germany and Singapore have been recently, as Morrison pointed out. But it is becoming more obvious that the picture of economic strength the government campaigned on in the election is out of step with the reality, which is why interest rates are likely to get even lower.

As you've no doubt heard, the Australian Bureau of Statistics' (ABS) national accounts this week reported gross domestic product grew at 0.5 per cent in the June quarter, taking the annual pace to just 1.4 per cent. That's lower than the Reserve Bank's latest forecast, made last month, for growth of 1.7 per cent.

Comparing GDP growth with the budget forecasts is a bit trickier because it requires us to briefly change gears and look at GDP on a "year-average" basis. That means comparing the economy's size over all of 2017-18 with all of 2018-19, rather than the common "year-ended" method of comparing the June quarter of this year with the June quarter of last year.

On a "year-average" basis, this week's data showed annual economic growth of 2 per cent. Again, that is weaker than the 2.25 per cent that the budget forecast, although not massively so.

So, for all the "no surprises" claims, it is a fact that this week's data was weaker than both the Treasury and the RBA had expected. But that's only part of the story.

Unfortunately, when you dig into the reasons why growth was weak, it suggests the chances of a sharp pick-up aren't great, either. There are bits of the economy that are doing quite well, but the household sector — which accounts for about 60 per cent of GDP — isn't one of them.

Switching back to the conventional year-ended way of describing changes in GDP, the ABS said consumer spending rose by 0.4 per cent in the quarter, and in annual terms it slowed to 1.4 per cent. A likely reason for the weak spending is that the "wealth effect" caused by falling house prices, alongside weak wages growth, is leading many of us to keep spending on a tight leash.

Business investment was also weak, falling by 0.4 per cent in the quarter, and 1.6 per cent in the year, notwithstanding some strength in mining.

On a more positive note, spending by government was up strongly, growing 2.7 per cent in the quarter and 6.2 per cent in the year.

Net exports (exports minus imports) also came to the party, contributing 0.6 percentage points to growth in the quarter. That was better than expected by many, but helped by weak imports, which tend to reflect soft consumer spending.

Drawing all these threads together, the situation isn't awful, and the quarterly rate of growth of 0.5 per cent is better than the September and December quarters of 2018. With house prices rising, and tax cuts flowing, the second half of this calendar year should be stronger than the first half.

Even so, it will be difficult for the economy to hit the RBA's forecast of 2.4 per cent growth over the 2019 calendar year and its 2.8 per cent growth forecast for 2020.

The picture to emerge is a sluggish economy that is being supported by government spending and a strong commodities sector. Chris Richardson, partner at Deloitte Access Economics, points out that to many of us, that feels soft.

"The bits of the economy travelling well at the moment are those that deliver profits rather than those that deliver wages. Many people feel the underperformance," Richardson says.

That said, Richardson says the economy's weakness is not the same thing as saying the budget is in trouble. Indeed, when the 2018-19 budget outcome is released later this month, it's likely to show a surplus, a year earlier than expected, thanks mainly to the surge in commodity prices.

"We have a Treasurer whose Treasury was too optimistic on the economy and too pessimistic on the budget," Richardson says.

But as Treasurer Josh Frydenberg has made abundantly clear, we are unlikely to get much extra budget stimulus anytime soon, unless there's far deeper economic slump, because the surplus is the priority. That commitment, however short-sighted, will put more pressure on the Reserve Bank to slash interest rates to fresh record lows below 1 per cent. That doesn't sound like a particularly "strong" economy to me.

a) What are the reasons stated for why GDP growth was relatively weak. (3 marks)

b) Explain why households might be “feeling the underperformance” of the economy

by more than the overall figures show. (2 marks)

c) Go to the Australian Bureau of Statistics website and find the Gross Domestic

Product figures for June 2019 that were reported in this newspaper article. Report

the Seasonally adjusted percentage change from June 18 to June 19 Chain volume

GDP and related measures figure. (2 marks)

d) Find and report the corresponding figure for June 2017 to June 2018 and explain if

you would rather have been the Federal Treasurer in 2018 or now. (3 marks)

Answer 1

1. The weak economic stance is attributed to slowdown in households average consumption which contributes 60 percent of GDP as well as weak wages growth and fall in housing prices. However case doesn't mention key geopolitical risks like Brexit and US China trade war which could have ripple effects on slowdown.
2. Households witnessed underperformance largely due to low wage growth and pessimistic budget which is indicator of contractionary fiscal policy leading to subdued growth. This created lower disposable incomes and lower probability to soend and consume and hence plummeted GDP.
3. June quarter GDP growth at 0.5% and Seasonally adjusted June quarter growth 2018 to June 2019 and related measures below:

• GDP at 1.4%
• Gdp per capita at - 0.2%
• Gross value added makret sector at 0.4%
• Real net national disposable incomes at 4.4%

June 2017 to June 2018 figures ar eas below:

• GDP growth at - 0.5% and CPI inflation higher than and 2019 period, GDP per capita degrowth at - 0.4% which was more complex to handle. Hence it would be much better to be in the Fed treasurer position in current scenario given better robustness and integration with expansionary fiscal policy of the Government.