Growth below 3% the “new trend”

By Leith van Onselen

Professor Ross Garnaut, one of the ‘godfathers’ of Australian economics and author of Dog Days, has warned that economic growth below 3% is the “new trend” and expressed alarm that Australia’s banks remain hooked on wholesale debt markets. From The AFR:

The author of Dog Days foreshadowed two years ago much of the current downturn in the terms of trade and its impact on the budget and living standards.

“There is nothing special in [this week’s] national accounts,” Professor Garnaut told The Australian Financial Review.

“This is the 12th quarter of below-trend growth. It is time to recognise a new trend and respond intelligently to it”…

Professor Garnaut warned that Australia’s big banks continue to depend “imprudently on the wholesale debt markets”.

“Let’s remember that the extreme dependence of our major banks in 2008 on borrowing from international wholesale markets would have brought them down were it not for the capacity of the Commonwealth government to guarantee $178 billion of their debt.

The reality is that Australia’s economic growth has been trending lower for a long time, as illustrated in the next chart:

Strip-out Australia’s strong population growth (mostly immigration), which exploded from the mid-2000s, and the growth in per capita GDP is even worse.

In fact, according to Business Spectator’s Callam Pickering:

Real GDP per capita has increased by 1.1 per cent annually over the past decade. Australia has just completed its worst decade for economic growth since Bob Hawke became Prime Minister back in 1983. It also highlights the extent to which strong population growth has created the illusion of strong economic growth.

The outlook is also poor. Productivity growth over the past 30 years was positively impacted by rapid technological change and micro-economic reforms implemented during the 1980s and early-1990s. Demographics were also favourable, with the large baby boomer cohort entering the workforce en masse, which cratered the dependency ratio.

However, productivity growth in the decades ahead is likely to be much lower, whereas the dependency ratio will worsen materially as baby boomers retire and the population ages, thus capping potential growth.

Therefore, Australia is indeed likely facing a “low growth” future, at least in per capita GDP terms.

Professor Garnaut also makes a valid point regarding Australian banks “extreme dependence” on foreign wholesale borrowing.

As explained in detail in this morning’s article, FIRE sector pushes risk past GFC levels, Australia’s FIRE economy – Finance, Insurance and Rental, Hiring & Real Estate Services – has grown to its biggest level in Australia’s history when compared against GDP:

With the ratio of offshore borrowings to GDP also hitting an all-time high 52%, surpassing the pre-GFC peak:

Of course, the lion’s share of the banks’ lending has gone into non-productive housing, which has also crimped Australia’s productivity growth, lowered potential GDP growth, all the while pushing financial stability risks past GFC levels.

[email protected]