The latest GDP figures out on Wednesday provided some good news, with growth improved on the weak March quarter largely off the back of a jump in profits and government investment. While there are some small signs that the improved performance of economy is flowing through to workers in the form of more hours of work, the amount of wages going to workers continues to grow at very low levels.
In the June quarter the economy grew by 0.8% in seasonally adjusted terms – a marked improvement on the 0.3% growth in the previous quarter. But even if the seasonally adjusted figure jumps around a bit, the trend growth of 0.7% is pretty decent – if not exactly stunning:
The economy grew by 1.8% in the past 12 months in seasonally adjusted terms, although a slightly better 2.1% in the more stable trends figures. But even this growth, while better than 1.9% of last quarter, is a demonstration of what passes for good news nowadays.
The June quarter marked the 19th consecutive quarter of annual GDP growth being below 3% – more than a year longer than the previous such low growth streak:
The growth sees us in the middle of the pack for the June quarter among OECD nations, though rather more at the lower end in annual growth terms:
But while the economy grew at a solid clip in the June quarter, the reasons for it paint a more mixed picture of how things are going.
Nearly three quarters of the 0.8% quarterly growth is due to public investment – and a large proportion of that was due to the timing of the transfer of the recently completed Royal Adelaide hospital from the private sector. Take away the 0.64 percentage points of growth generated by “state and local government” investment and suddenly the growth is looking pretty pathetic.
After a good fortnight of the government lambasting the ALP and Bill Shorten for being “socialists”, it was rather ironic to hear the treasurer, Scott Morrison, boasting of the contribution of defence spending on economic growth. National government defence investment grew by 26% in the June quarter, which contributed another 0.1 percentage points to growth.
But the purchase of the hospital also detracted from private investment. If we take away the effect of the purchase of the hospital, business investment actually contributed 0.1% points to growth:
Exports also contributed 0.6 percentage points of growth in the quarter and household spending 0.4 percentage points – offsetting the ongoing decline in non-dwelling investment:
Over the past year household spending has been the biggest driver by far on economic growth – contributing nearly two thirds of the entire growth of the economy. Generally this is not surprising – around 53% of our GDP is made up of household spending, but it is a bit odd given the annual growth of household spending remains very much subdued compared to the period before the GFC:
That we have been able to keep spending going at those levels is due not to improvements in our wages but through us saving less.
In June Australian households saved on average 4.6% of their disposable income – the lowest level since the start of the GFC and the 13th quarter in a row without a rise – a run not seen since the heady spending days of the mid 1980s:
Households of course are having to reduce their savings because wages growth remains particularly pathetic.
Oddly, in the past year there has been a nice uptick in the amount of hours worked, which normally results in improved wages growth, and yet wages growth has been falling.
While nominal GDP grew at a very strong 7.6% (the best for six years), wages and salaries – which normally follow nominal GDP growth – grew in the past year by just 1.5% in trend terms:
The reason for the disjoint is that while corporate profits account for just a quarter of GDP they contributed to 60% of the growth of nominal GDP in the past year.
In the past year, corporations gross operating surplus (a proxy for profit) grew by 21.1% – the best result for nine years:
It would seem the economy is massively out of whack – with profits not leading to wages growth. Profit growth and a quarterly or even annual increase does not necessarily lead to an increase in wage growth. Over time it does flow through, but it can take 3 years and so one hopes that this current boom in profits will in time lead to an increase in wages.
One problem is that the past three years have featured very low profit growth, so even with the 21% growth of the past year, the gross operating surplus has only grown on average by 3% during that time. Unless the strong growth continues, it is unlikely that wages will improve:
If you are looking for some positive signs, at least the growth of wages and salaries improved in seasonally adjusted terms – up from 1.3% to 2.0% – but in the long term context it doesn’t look like much of a corner being turned:
The added wrinkle is that the big boom in corporate profits has come via a massive surge in export prices, with the terms of trade up 21% in the past year. Now that normally flows through into a big upturn in mining investment, and thus a demand for workers and in turn better wages. But the mining industry is currently in the production phase of its boom – and that is not a phase that needs a growth in jobs.
The worry is the mining industry might continue to be a powerhouse of economic growth, but due to profits rather than investment, and thus the stronger profits won’t lead to stronger wages.
And so the economy continues to tick along due in part to exports, household spending and timely government investment. While exports should remain solid, the government investment is mostly a one-off.
That means the ongoing strength of the economy comes down to household spending. Given the low wages, growth is dependent on people reducing their savings. That is hardly sustainable and why the government – and the rest of us – will be hoping the good noises in parts of the economy soon begin to be echoed in our wages.
- This article was amended on 7 September 2017 to correct a claim about private investment.
