Bill Mitchell, Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, last night published an interesting post dissecting Australia’s December quarter national accounts.
In the post, Professor Mitchell argues that Australia’s non-mining economy is in recession based on two consecutive quarters of negative growth in state final demand. Below are the key extracts:
In media interviews over the last 6-9 months I have been saying the “East Coast” of Australia is either in or close to recession and it is only the mining states of Western Australia and the Northern Territory, which are keeping Australia in the positive real GDP growth range.
The record terms of trade that Australia has enjoyed in recent years (since around 2005) has promoted exchange rate appreciation. Since early 2001, the Australian dollar has fluctuated significantly. In March 2001, the Trade-Weighted Index was 47.4. By June 2008, it had risen to 73.4 (a 55 per cent increase). Then it plunged to 53.2 six months later (a drop of 28 per cent), only to rise again on the rebound in commodity prices to 79.2 (a 49 per cent rise). Similar movements against the major currencies also occurred. It is now over parity with the US dollar.
However, the commodity prices for non-base metals have not enjoyed the same increases as for the mining commodities. This suggests a classic “Dutch Disease” situation. In the Australian context, the concept typically applies to the impact of a resources boom on the Australian dollar.
The appreciating currency then: (a) damages the competitiveness of ‘import-competing’ sectors (dominated by manufacturing, service and agricultural firms) because import prices fall relative to local cost levels; and (b) promotes wage pressures which further damage sectors who are not enjoying buoyant demand conditions.
A trend that has been emerging in Australia for several years, whereby some sectors (such as manufacturing) and regions (such as Sydney and Victoria) are struggling while other sectors (such as mining) and regions (such as Western Australia) are booming is consistent with these exchange rate dynamics.
These developments – popularised by the term ‘two-speed economy’ – whereby serious sectoral and regional imbalances accompany overall economic growth, challenge the fundamental patterns of our economic and social settlements and threaten the financial viability of many Australian households.
While the term ‘two-speed economy’ has taken on a number of meanings in different countries the imbalance of most interest here is the precariousness of the NSW (particularly, Sydney) and Victorian (Melbourne) economies relative to the prosperousness of the mining regions of Western Australia, Queensland and the Northern Territory.
Several coincident factors are driving the ‘two-speed’ economy some of which have not received much public attention (for example, the fiscal austerity that the national government imposed before the non-government sector had recovered from the 2008-09 slowdown.
This is a danger for any nation where exports are highly specialised and where the traded-goods sector is comprised of one dominant industry group. It is clear that mining has been growing at the expense of manufacturing and agriculture.
While the Australian Bureau of Statistics produces annual measures of Gross State Product, they also produce quarterly measures of State Final Demand (Australian National Accounts: State Accounts, cat. no. 5220.0). State Final Demand is thus the best estimate of economic activity available at the State/Territory level on an on-going basis (quarterly).
The ABS define State Final Demand as:
“a measure of economic demand for products in the economy. It is an aggregate obtained by summing government final consumption expenditure, household final consumption expenditure, private gross fixed capital formation and the gross fixed capital formation of public corporations and general government. It is different from Gross State Product (GSP) as it excludes international and interstate trade as well as change in inventories.”
What does the evidence tell us about the existence of a “two-speed” (or multi-speed economy)?
The following graph shows the quarterly growth in real State Final Demand for the last three quarters by State/Territory. It is clear that Victoria, South Australia and Tasmania are in recession (at least two consecutive quarters of negative output growth).
New South Wales is close to recession and Queensland avoided that classification by a whisker (zero growth in the December-quarter). Western Australia is also slowing now as the peak of the mining boom fades.
The next graph aggregates the States/Territories into two groups – East Coast plus South Australia and the two mining strongholds of Western Australia and the Northern Territory. I excluded the Australian Capital Territory because of the dominance of the public sector. Most of the Australian population are concentrated around the East Coast. Very few Australians live in Western Australia or the Northern Territory (although Perth, the capital of WA is a large city).
The data shows that the East Coast (Tasmania, Victoria, New South Wales, and Queensland) plus South Australia are now in recession as hypothesised.
To give you some idea of the disparity in growth across States/Territories since the Mining boom began, the following graph indexes real State Final Demand from the March-quarter 2005 (base quarter). This was about the time the first phase of the commodity price boom started.
It is clear that the Western Australian economy has been the stand-out performer given its concentration of mining. The Northern Territory and Queensland (both who enjoy strong mining sectors) have also enjoyed similar prosperity although they both flattened out during the economic crisis.
As the nation’s capital and public service centre, the ACT has also enjoyed relatively strong growth in State Final Demand.
Contrast that to the manufacturing states of NSW, Victoria and South Australia and the smaller state of Tasmania. Their performance over the period has been modest at best and all are in recession or near recession now…
The blanket statement that Australia grew close to trend in 2012 not only obfuscates the fact that the current growth rate is well below trend and declining even further but also hides the fact that the majority of the population are living in regions which are in recession. That paints a totally different picture than the political spin coming from the Government.
I think today’s national accounts data paints a gloomy overall picture for the Australian economy.
Of course, the December quarter national accounts are backward looking, and given the recent improvement of the various second tier data, it could be the case that non-mining states have already exited recession, but that it won’t show up until the March quarter accounts are released mid-year.