The Australian economy is not growing at trend

Just before Christmas, I bemoaned the state of economic reporting by the Australian financial media and associated economist punditry, which seemed to be stuck in either “permabull” or “permabear” status. Whenever the quarterly Gross Domestic Product (GDP) figures come along, like they did today, the former status is usually supplied with a “raucous display of big numbers on capital expenditure or other cherry picked data, then annualised to infinity and beyond”.

Apart from the peripheral extreme pundits, and the notable exclusion of Westpac’s chief economist Bill Evans, there has been a mea culpa today as the headline figure – 0.4% quarterly and 2.3% over the year – came in as disappointing and not in line with most economic models. Except here at MacroBusiness.

Why? Because we look at the real economic growth – adjusted for inflation and population – and the underlying causes thereof, namely government spending and credit growth. This methodology strips away the inflated effects of population growth, stimulus packages and other economic chicanery.

First, let’s have at look at this measure using the USA as a reference. As seen in the 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:


Aussie! Aussie. Aussie?

For the Australian economy, I’ve created 4 charts, using the ABS National Accounts data calculating real GDP per capita:

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

The trend rate over the entire period was 2.4% 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 1.48% per annum:

The fourth and final chart highlights the previous 5 years, encompassing the GFC and up to the December 2011 quarter period, where GDP per capita peaked in March 2008, bottomed in June 2009:

The outcome over 5 years? Trend growth at 0.72% per annum, with peak to trough and current total growth as marked on the chart.

Over the last 12 months, yearly GDP per capita growth was at 0.7% –  substantially less than the long term rate of 1.48% over the last ten years, or the 2.4% rate over the whole data series.

The Australian economy is still growing, but at half the long term pace on a person by person basis, and given the problems with the standard CPI measurement (which contrary to popular belief, does not measure inflation), it is likely that purchasing power is not being maintained either.

With a government forced to return to surplus to maintain its AAA rating and thus reduce stimulus spending, credit growth running at 35 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 post GFC), its hard to see how GDP growth can return to the mean trend of pre-GFC years.

It’s also hard to see how this is surprising.


  1. It’s interesting Prince to see this, and in terms of the economic cycle it’ hasn’t taken long since the Canberra crowd mainly were spruking endless boom. They can try and blame Europe, and the US, but maybe they’ll wake up to the global nature, and they had their eye off the ball. I could go on, but we’ve been let down badly yet again.

  2. not growing at trend? but Adam Carr (GDP +1% exp vs 0.4% act. ooops!) and the RBA just yesterday say it is? looks like some ones telling porkies.

    • I admit there are two glaring problems with my analysis:

      a. I do not contend – nor should anyone with an ounce of sense – that the deflator (CPI) actually measures inflation. So it doesn’t reliably count the purchasing power increase of the economy, at a per capita level
      b. more ideologically, GDP is a failed measure of economic success, and can include a lot of wasteful and unproductive components that boost aggregate but actually harm the economy long term.

      But I work with the tools I’ve got. I tell you, chasing squiggly lines on a chart is a lot easier than this economics malarky. At least I know in that game I’m mainly dealing with randomness…

      • I agree with you on this issue. That is what we have and we have to live with it. I just want to point out that our government (ABS) as well as other governments tend to reduce measure of inflation over the last two decades or more. They use different methodology than what they used in 60s and 70s. So all this means that current conditions are even worse relative to past performances. We are growing well below the trend in the past (if we grow at all).

  3. Diogenes the CynicMEMBER

    It is not surprising to some of us. But this message needs a wider audience.

    Of course when the trend figures go negative there will be a lot more notice paid, mostly too late at that point but oh well…

  4. DouglasMEMBER

    TP Well done. What I would say is that this proves that people like Oster (NAB) whose forecasts I called pure fiction on MB and Gittins live in a fantasy land far removed from anecdotal evidence of on the ground conditions. As Martin Feil has pointed out in the Age today a modern economy must add value and Ken Henry, Martin Parkinson and Glenn Stevens seem very far removed from this concept in their prognostications.

  5. um then why are the various bodies out there saying they need cpi+ / awote+ pay rises due to productivity increases, can I get a refund of amounts paid to my staff on the pretence they were more productive ??? oh better still can I get a refund on tax on public sector non productivity increase etc…..

  6. Alex Heyworth

    Prince, if you keep telling the truth like this, your licence to blog will be revoked when the new Ministry of Truth is established.