Cross-posted from Gareth Aird, senior economist at the Commonwealth Bank.
Key Points
Australia’s commendable aggregate growth rates are boosted by strong population growth.
Per capita measures of the economy paint a more sobering picture, particularly those relating to income.
Local policymakers should place a greater emphasis on per capita measures of the economy, rather than aggregate growth rates which are heavily impacted by population growth.
Overview
Most economic commentary focuses on aggregate growth rates. GDP and employment growth, for example, can be headline grabbing statistics. But they are heavenly influenced by population growth – more people means more spending. Making comparisons of economic performance between countries using aggregate growth rates can be misleading if population growth rates materially differ.
Australia’s strong population growth, driven by net overseas migration, means the economy needs to be expanding at a faster rate than otherwise to achieve full employment. That of course means that the economy has the capacity to expand at a faster rate too. This means that potential growth, which is a function of population growth and productivity, is higher in Australia than most other OECD countries because of a faster growing population (chart 1).
Advertisement
Having a strong population growth rate is great for aggregate growth rates, like GDP, because it allows them to be higher than otherwise for a given level of productivity growth. It also means it is much harder for the economy to enter a technical recession – defined as a fall in GDP over two consecutive quarters. But if we want to measure changes in living standards, which ultimately matters most to households, then we need to look at how the economy is going on a per capita basis rather than just reporting and focusing on measures of aggregate demand. On that score, the news is a little more sobering in Australia. It suggests that policymakers should place a greater emphasis on per capita metrics and a little less emphasis on headline GDP growth…
GDP per capita
Let’s start with some good news. GDP growth in Australia is growing at a robust rate which means GDP per capita has also been lifting at a healthy clip. The latest national accounts data shows that GDP per capita rose by 2% in the year to QII 2016 (chart 3). This is a solid rate and is the fastest pace of growth since the Global Financial Crisis (GFC). So far so good. The acceleration in GDP per capita growth is attributable to a massive lift in productivity growth in the resources sector – essentially the dividend of the mining investment boom.
Advertisement
There has been a substantial contribution to GDP growth coming from net exports and more specifically resource exports (chart 4). Mining production is not labour intensive like mining investment and therefore productivity rises once production comes on stream. But this lift in productivity will wane over time. And unfortunately, the lift in output hasn’t generated the increase in national income that was originally envisaged because hard commodity prices have fallen significantly from their peak, notwithstanding the recent bounce. As a result, GDP per capita growth looks healthy and should continue to stay buoyant over the next few years. But it gives a misleading impression at the moment of both domestic demand per capita and income per capita – we focus here on the latter.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.