Australia is not growing at trend

The majority of reporting by the Australian financial media and associated economist punditry, focuses almost solely on a quarterly snapshot of growth in Gross Domestic Product (GDP). This is usually done in scattergun fashion, alongside a raucous display of big numbers on capital expenditure or other cherry picked data, then annualised into the beyond.

What is missing of course is how the growth in the economy effects each Australian, best measured by the change in real (adjusted for inflation) GDP per capita. As we’ll see soon, this strips away the inflated effects of population growth, stimulus packages and other economic chicanery.

As seen in the US Chart below from Doug Short’s blog, the US economic “recovery” as measured by US GDP per capita is still 3% below Q4 2007 levels, falling from $50,020 to $48,520 in real terms:

As I said in my Chart of the Day post recently:

… US GDP (growth) is only being held up at ca. 2% p.a because of massive (10% of GDP) government deficit spending. That spending will be cut in FY2012/13 automatically, and may even be slashed further on the outside chance a Republican candidate wins the election against incumbent Barack Obama.

You may recall that the US government and US Federal Reserve have spent (and created) a little bit of money between these two periods, whilst cutting the cost of borrowing an unlimited amount of money for the banks to zero, forestalling what could have been a Depression.

This puts their “recovery” in a better light, as unemployment (as measured more broadly by the U6 measure) remains at 16% having been 8% previously:

For the Australian economy, I’ve created 4 charts, using the ABS National Accounts data to provide a comparison.

First, here is the whole data series of real GDP per capita, from September 1973 to September 2011, showing the inexorable growth of the Australian economy:

The trend rate over the entire period was 2.42% per annum.

Second, I’ve zoomed in on the last 2 recessions, to provide some context of where we are today. Real GDP per capita contracted over 6% peak to trough 1981-1983 and just over 3% in 1989-1993:

The third chart plots the last 10 years where the trend growth was 1.5% per annum:

The fourth and final chart highlights the GFC up to the current period, but before having a close look, let’s go over what occurred following March 2008, where GDP per capita peaked at $58744 (or $14686 per quarter). The Australian economy had the following stimuli in the wake of the GFC:

  • 1.2 million or 5.7% increase in population
  • $270 billion increase in housing debt
  • $42 billion in government stimulus
  • 300 basis point (3%) reduction in cash rate (total 400 points peak to trough)

The outcome? A 0.53% increase in GDP per capita, to $59,060 (or $14,765 per quarter) over 3.5 years.

Half a percent…over 14 quarters. Annualise that and its barely statistically perceptible. Measured against the trend rate over the last 10 years of 1.5% growth per annum, and its nowhere near trend.

However, as you can see from the chart, if we measure from trough to peak, the result is more obvious – a 2.2% increase from the June 2009 quarter to September 2011 quarter, but the outcome is the same. An annualised trend rate of growth of 0.98%, substantially less than the long term rate of 1.5% over the last ten years, or the 2.4% rate over the whole data series.

With a government forced to return to surplus to maintain its AAA rating and thus reduce stimulus spending, credit growth running at 30 year lows and decelerating, a slowdown and likely reversal in Terms of Trade from record high commodity prices and in the absence of further Chinese stimulus (which arguably did more than all the endogenous stimuli outlined above), its hard to see how GDP growth can return to the mean trend of pre-GFC years.

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  1. Now that is what I call great analysis. It puts the lie to what Swannie has been carrying on about and should be distributed to all politicians, bureaucrats and traditional (ie bought and paid for) media.

    It also means we fit the criteria for being in recession and highlights how much the gov’t has spent trying desperately to avoid a recession and cleansing of malinvestment.

    Brilliant work!

    • Hey the Sun’s-up..n,Well look what you’ve done…not you RodZone..sorry to hear about 2008,Merry Xmas gotta-go..yeah ,
      H&H,between your Darth Vader suit and what we have here is left much to-be explained,like somebody left the gate open and a helicopter flew-in…
      I mean I’ve been hovering over it all,all night..
      I can say UE is what he says,Jackson hasn’t moved all-night,QC’s probably been out partying all-night showing-up,n-Booga n nothing really to chew there either,
      Australian Political,that’s just been stop at red trees all-night zen-out,
      V’s been covered in-dirt hasn’t-moved, and they’re all left snoring from it’s Xmas..hmm Prince is going to be pist..tell whipped when he tries to get his head around this ..thank goodness H&H is away…
      I reckon ,You sittin down ..,it was Rumplestatskin,,
      Yep,hard to believe ,but,Every-time he made me write something he moved,and I think thats Fairy-Dust he’s been sprinkling like presents…
      just gone alarms and it’s a new day..
      so Ladies and Gentlemen start you’re key-boards,I’m going to Bed…
      Cheers JR

    • I say that it is entirely predictable that an economy with strangulatory urban planning and inflated urban land prices, will experience a falling economic growth and productivity trend.
      Urban economies are ultimately what matters in the long term. We can see what 60 years of “Town and Country Planning Act” has done to the UK economy. Australia’s future is entirely predictable.

  2. Nice charts Prince. You could argue that the aberration was the period Sept 04 – Sept 08, rather than the past 3 years, with the past 3 years being the “cleansing”. The counter to my own argument of course is that we’re probably not in any better position now than we were 3 years ago.

  3. Top notch analysis Prince. Really shows how flawed GDP measures are. GDP per capita is far better as you have shown. A GDP per captia that is then adjusted for debt-fuelled production would be the bomb. Great stuff

  4. Prince, is it possible to break down the aggregate GDP/capita to understand how much of this was attributed to the “mining Boom”? Therefore, we can get better visibility of how slow, the slow lane of the economy is going?

  5. Of course, what the series does show is that growth – as measured by GDP data at any rate – appears as a permanent feature of the economic process.

    This is an interesting phenomena in itself, and, in some ways, is an unexplained mystery and invites some obvious questions: Why do we have growth? What propels it? How can we guide it? What do we need to do to optimize growth?

    If we can achieve 2.4% real per capita growth on an indefinite basis, then real incomes will double at least every generation. However, at another level, this understates some other elements that contribute to improved living standards for the world’s population. Improved access to water and food supply, better housing, education, transport, communication and health services, and improved quality (as distinct from price) of consumer goods and services of all kinds make very significant differences to people’s lives, even if they are not captured in GDP data.

    Surely we should try to develop a better understanding of how to define, measure and manage improvements in economic welfare in general.

    There is one other straight-forward deduction to make from the charts. That is, recessions cause long-run deflections from the trend, so the more understanding we have of the processes by which recessions are inspired and modulated, the better. I think this also bears on so many of the issues that have been given prominence at MB – especially the origins of economic instability and the value of trying to apply economic theory to the 3-d world.

    •,wanta bet you started writing before me on this ,or should I just wish you Merry Xmas..briefly..cheers JR

    • B, not sure if you’ve ever had a look at a GDP per capita vs life expectancy chart (plenty available via google), you only need about $3000 p.a. to get to 70 years of age. Most of this benefit is gained by reducing infant mortality. Above the $3000 level you are really working hard to keep people alive for another 10 years. What is really interesting is the countries that are outliers, most of which are African countries with high GDP values but low life expectancy due to AIDS (Botswana, Sth Africa), Cuba is one working the opposite direction.

        • 4-D = 4 dimensional

          3 spacial dimension
          + 1 dimension of time
          = 4 dimensional space time

          which is the real world that we live in with all it’s complexities that neo-classical economic models fail to capture (and the MSM fail to explain) to which Briefly was referring to when s/he said “the value of trying to apply economic theory to the 3-d world.”

          Do not forget == Do remember

          • ooh’re good

            Sounding,Lord’e me ,n Seedy and all,forget time remember meantime theory,anyway
            Ya reckon time exists with-out movement ,would it exist if the whole of everything Froze,like a Bear Stearns Fund ?
            cheer JR

          • Too right, Dr Bob. We are interested in processes that have motion, that are dynamic and are capable of being understood, defined, measured and actuated within time.

            …..such an appetizing idea in itself….

          • arr good on ya,briefly ,now what am I going to do with the A4,Rulers and Compass and pro-tractor set I got you for Xmas
            Shucks,Guess I’m just a 2d.. kinda guy

  6. If you take the period 1995-2007, the rate of growth appears higher than 2.4% for the whole series, or 1.5% since 2001. Thus, the post GFC period has seen a substantial change in the rate of growth >2.4% to <1%.

    A long term analysis of GDP composition would be a worthwhile exercise at some point soon.

    Great work Prince

    • Any chance of posting some open data sets for us to play with?

      I’m sure I’m not the only geek who likes to crunch numbers and graph data.

      • It would just be ABS data that I would compile myself. I generally try and get the latest document from the website to make sure the recent figures are up to date (revisions, trend v seasonal etc)

        ABS release 5206.0, plus some related releases, and there are also State Accounts – 5220.0

        There is extensive detail in the tables, and there are good explanatory documents as well, which really helps to understand the limitations to the data.

  7. Yeah but, didn’t the once-in-a-hundred-years mining boom kick in around 2003? Why hasn’t this delivered above trend growth and riches to all Australians?

    Your charts are telling me the 2001-2011 GDP per capita growth rate is slower not faster than the long term trend.

    The line looks steepest from about 1992 to 2000 — the pre-mining boom era — and flattens off after that.

    Heresy my friend. Heresy!

    Over to you MineBot…

      • It is some measure, but not a good one, since it fails to measure the increase in non-labour inputs as well.

        • ….and so, with so many other considerations, we realise that GDP on its own sucks pretty badly at actually giving an idea of the prosperity of a nation…

          …and that’s without me going into any more detail – YET AGAIN, for my MB and TF brethren – as to why point value metrics tend to suck vs distributions are simpler data…


    • I’m not an expert on the subject, but could it have something to do with the fact that selling more dirt is not really value added?

      A cursory look at these (wikipedia) figures indicates that per worker production has declined in terms of tonnage. Will have to look more indepth because that surprises me given capital expenditures and talk about productivity.

      However the value of that volume has obviously increased heaps, however would be interesting to strip out inflation on those numbers.

        • Unless of course our huge investment in mining is followed by a collapse in demand for our dirt due to bursting real estate bubble in China.

          I’m not saying that will happen, but until a few months ago, the conventional wisdom was that it can’t happen.

          • Demand will most likely be there, because the big miners will drop the price to keep their production chain operating at an efficient capacity.

            Productivity measures quantities, so if the price collapses, it doesn’t really matter, as long as quantities shipped tick up.

            In extreme circumstances, yes, the quantity produced may be limited due to such low prices. But we will see in due course if that is the case.

          • I disagree with you Remplestatskin. If China experiences a massive oversupply in real estate, which is the case now, then they are not gonig to be ordering more dirt. I got a feeling anyways they got mountains of dirt now as it is but dont report on it. Just dont see them ordering more if they dont need it.

          • Yes ,they’ve got it stored in Hot-Air balloons,all over China and nobody’s allowed to Disagree ,not even if you Look,Bulked or Shiny or painted green for that’s Christmas..
            Santa’s Rules…Sorry

          • Rumple:

            But we already ship half our ore to China. If demand from China slumps, how can the miners possibly ramp up volumes? Who’s buying? Aliens? There’s no-one on this planet that can take up the slack from China … at any price.

            This is an argument I often hear from the mining-cheerleaders: If commodity prices fall, we’ll make up the difference in volumes. Well, that may work in a scenario where demand remains constant or growing, but new supply comes online, but I fail to see how it can work if demand slumps.

            When new supply meets collapsing demand, there is only one outcome: We sell less dirt and much lower prices.

          • Lorax…tehy may buy from mines they OWN rather than from companies who have shafted them one form and another….just a possibility.

    • Hey,Lorax, hows it go’n….Merry Xmas cheers ,hey ..I think the MineBot has got something going-on at his second job at the Perth Airport..You sittin down..,he’s still down there,yeah,he’s been unplugging his modem-line…and rolling down to the canteen for mid-night affairs of guessed it ,he’s in love with the Coffee machine…fair dinkum ,the cleaner caught them..(even though i was already suss when the Tech that fine-tuned his new personality chip up-grade,said that 3d1k’s circuit-boards were covered in, coffee-grains,milk-powder and sugar..nuff-said)
      Anyway,how’s the night-cleaner,he noted that after cleaning the floor and the coffee machine slots 3 times,and still no-one had, entered the closed airport..and it surely-might,warrant alook ?…apparently,they were at it like CPU’s n I-LuvU’s ,That’s our 3d…
      You know ,I’m abit worried he’ll fall in love at his second job,and end-up getting a conversion from being our Mining Pr Bot/half ticket-machine at the airport..n become a part-time lover Hot-dog machine and move into the canteen..for good….sheez-Mate,they haven’t got the internet at the canteen,and you know 3d’s not program-capable for wireless…could be problems..then again.So-sorry to bring ya such-bad ,at Xmas..but 3d might be lost forever..but,cheer-up JR

  8. Politicians and Journalists must hate the internet with blogs like this they will all have to become more accountable and honest. Thanks.

    • needs to tip-toes,Mat-toe’s ,musts be’s wells and truly’s dreaming of Santa’s ,by now..I always like to leave the fresh ones till last ,you never no when they rest…don’t worry Mat you’ll get the hang of not messing with me during the day..You sure you want to keep that name..cause although you’ve committed no wrong..I’m still going to have to foul you for having a toe over the Mat ,Mat on that hate word …Santa’s Rules JR

      • mat,mat,you asleep..right about those concerns of yours..n I’m glad you thought it over long enough..
        so all I’ve got to do is finalize the last of these electrical diagrams for the Motor-home I’m working on…and pick-up another Turkey,after I finish at sunrise ,and then meet you tonight,it should only take a couple off weeks to wire …problem solved
        Gee thanks mate ,Merry Xmas for when you wake-up
        Iou sacks of..and even throw in the steel-toes,with the Tin-Hat..JR

  9. Sure serms of trade can reverse but so also can the migration not th ewhole 1.5 million but perhaps the ones that find themselves in the negative equity trap.

    Put cash in pocket and go back home.

    I have read that this is happening in Spain where South American migrants are bailing out and leaving debt behind.

    Its never as simple as it seems.

    Thanks for a great read !

  10. Are we taking a glass half empty view here? While I accept per capita growth of less than 1% p.a is not great. However, compare to the last two Oz recessions – where growth actually declined 6.3% and 3.1%, and look at declines in other counries since the GFC – then +1% look pretty good.

    • Its definitely half full, no doubt about it we are not in recession and not in the same position as other developed countries – but the problem is the size (and length) of the hoses required to fill the cup and the leaky bottom due to disleveraging of Australian households, let alone the crumbling “Made in China” logo on the bottom…

    • If we had a political and economic structure that was more flexible and robust, i believe Australia would be on the cusp of something huge.

      Over the next couple of years Europe is going to go through a shower of austerity, brain drain of an ocean going class with educators, engineers, scientists, etc imagine if Australia could take advantage of that opportunity, instead we will probably only be able to offer them jobs as baristas or taxi drivers

  11. Seems to amke the case that 73 to 91 was a sustainable trend and that 93 to 06 was a debt fuelled aberration, with 07 to now being being a recovery without the benefit of the debt increases.

    I think Steve Keen’s emphasis on the role of debt, particulalry household debt changes, explains all this.

    By the way, how does an economy enjoy compound growth to infinity?

    This video of a lecture by Prof Albert Bartlett on the lack of understanding of the exponential function is a must:

  12. Prince …my comments under ‘Australia awaits Austerity’ maybe should have been posted here so I repeat them.

    I have been thinking about this concept of GDP for a long time. The whole thing is askew and over some years, particularly in discussions with my somewhat over-bright economist son, I have had the concern that the whole thing doesn’t measure foreign ‘Investment’ response and takes not enough account of the CAD. Now at a conceptualt level this is so. Essentially, in measuring GDP, we take the Foreign debt that results from a CAD as unlimited in both amount and time. Clearly this is not so.

    However my concern here is with some of the maths. When we finance the CAD with asset sales eventually we face a massive outflow of funds in the form of dividends. This will massively affect the CAD but it will also affect the GDP measure…..EVENTUALLY. Meanwhile what is happening is that the dividends from the investment are largely being re-invested within Australia. So essentially, with this foreign investment dividend re-investment what we have is a claim on future income flows in the form of increased future repatriated dividends. These dividend re=investments are being included in GDP but not offset because they are not flowing out NOW. Yet flow out they will.
    Thus our GDP is being boosted by future liabilities for dividends while those liabilities are not being accounted for in any way.

    Open to thoughts!

    • See the paper I added in my post below. Even the guy that came up with the GDP concept in the 1930’s warned against it being used as a measure of economic health. It is a meaningless and highly distorting concept in many ways.

  13. Rumples…I’ve sent a slightly expanded copy to ‘contact’ I’d be interested in your thoughts.

  14. Very good analysis…strips away the noise. We should remove the term ‘economist’s’ from many of these pundits and view them for what they are – mouth pieces of the institution’s they work for. Mainstream economics is a sham anyway…simplistic concepts overlayed with some ‘complex’ maths to make it seem important and scientific.

    When you dig into it you quickly realise that Costello and now Swan are illusionists and their stupidity has grossly distorted the economy – poor public infrastructure and investment in combination with, I believe, the highest level of personal debt in the OECD at 160% of GDP.

    We should really eliminate GDP as a measure of national ‘health’. Even the guy that came up with the concept in the 1930’s warned against it being use as a measure of national ‘well being’. Other nations are experimenting with alternatives.