GDP in detail: National income booms as workers go bust

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By Leith van Onselen

The Australian Bureau of Statistics (ABS) today released the national accounts for the December quarter, which registered a 1.1% rebound in real GDP over the quarter and a 2.4% rise over the year, beating economists’ expectations of a 0.7% rise.

On a per capita basis, real GDP rose by 0.7% but was up by just 0.9% over the year.

More importantly for living standards, real national disposable income (NDI) per capita rose by 2.5% over the quarter and by 5.3% over the year, thanks to the surge in the terms-of-trade, although the average workers’ income registered almost zero growth in 2016 (more on this below).

According to the ABS, seasonally adjusted GDP growth for the quarter was driven by Household final consumption expenditure, which contributed 0.5 percentage points and public capital formation, which contributed 0.3 percentage points to growth.

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Quarterly final demand, which excludes export volumes, also rose by 1.1% over the December quarter. The gains were broad-based, too, with the NT (+3.8%), VIC (+1.7%), and the ACT (+1.6%) leading the pack and WA (+0.4%) lagging:

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In the year to December 2016, final demand growth was moderate, growing by 2.1% nationally. The territories lead the way followed by the bubble epicentres of NSW and VIC, whereas WA dragged, recording a heavy fall:

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The terms-of-trade jumped by a seasonally-adjusted 9.1% over the quarter and by 6.0% in trend terms. Over the year it rose by 15.6% in seasonally adjusted terms and by 13.5% in trend terms:

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Predictably, the rising terms-of-trade juiced national income growth, with real national disposable income (NDI) rising by 2.9% over the quarter and by 6.8% over the year.

Even after population growth, per capita NDI rose by 2.5% over the quarter and by 5.3% over the year:

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Still, since December 2011, per capita NDI has fallen by 1.8% versus 4.6% growth in real per capita GDP.

Moreover, despite the rebound in per capita NDI, the average compensation of employees remains in the gutter. It fell by 0.2% in the December quarter and registered just 0.1% growth over the entire 2016 calendar year – the lowest growth recorded in the series’ history:

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Adjusting for inflation, Australian workers have gone backwards. Hence, they are not sharing in the national income gains.

The latest rise in the terms-of-trade and NDI also helped nominal GDP to rebound strongly, rising by 3.0% over the quarter and by 6.1% over the year:

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Moreover, the below chart shows how nominal GDP is now tracking just below the average since 1990, which should make life easier for Government finances:

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Real GDP per hour worked rebounded by 0.4% in the December quarter and was up 1.9% over the year, suggesting better labour productivity:

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However, the household savings ratio crashed 1.1% to 5.2% – the lowest reading in the post-GFC era:

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There’s a lot of good news in this release, namely:

  • the strong rebound in headline (real GDP) growth and reasonable growth year-on-year;
  • the strong rebound in NDI per capita, courtesy of the lift in commodity prices and the terms-of-trade, which is usually a good proxy for living standards;
  • the strong rebound in nominal GDP, also courtesy of the lift in commodity prices and the terms-of-trade, which is usually a good proxy for tax revenues; and
  • the improvement in labour productivity (GDP per hour worked).

A big worry, however, is that Australian workers are not sharing in the national income gains. As shown above, the average dollar compensation of employees rose only 0.1% in 2016. This means workers went backwards by some 1.4% after adjusting for inflation (CPI).

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Another worry is that the savings rate continues to fall, which coincides with the ongoing rise in the ratio of houehold debt-to-disposable income and GDP.

Moreover, Australia’s 10-year annualised growth in per capita GDP is now tracking at its lowest level on record – i.e. even worse than the 1980s and early-1990s recessions:

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This suggests that Australia’s economy has grown primarily because of strong immigration and population growth. Remove these from the equation and Australia’s per capita GDP growth has been poor.

If everyone’s share of the economic pie is not increasing, what is the point?

[email protected]

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About the author
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.