GDP is the go-to measure of the economy. But while handy, GDP has numerous problems – many of which are quite apparent right at the moment. Australia’s economy is growing at above-trend levels and yet there is little sense of any great economic strength present in people’s lives or even in the government’s budget.
In some ways Australia is rather GDP-centric. Unlike in the US, for example, we use two negative quarters of GDP growth (seasonally adjusted) as the indicator of a recession. It’s a pretty silly way to judge such things, but because of it, there is always a lot of attention on how GDP has grown every three months.
I am certainly not one to throw stones in this regard – I cover GDP growth as much as anyone – but when looking at the final number it’s always worth noting what is going on. Caring only about the final GDP growth figure without considering the moving parts that brought about that number is like buying a car without bothering to lift up the hood and check the engine.
One problem with GDP is that – as was noted in an excellent article in the Economist earlier this year – it doesn’t count a lot of work and production in the economy (such as unpaid labour) and what it does count is often hard to measure.
Even if we use a per-capita figure to take account of population increases we can still arrive at a growth figure that doesn’t seem to gel with our day-to-day experience.
And the less a figure reflects what the people in that economy experience, the less valuable it becomes – especially when trying to engender confidence.
One problem is that GDP – even per capita – is a measure of output which doesn’t say a heck of a lot about people’s incomes, and certainly nothing about inequality. We don’t get a share of GDP per capita in our bank accounts (if you did, in the past 12 months you would have $68,523).
So rather than just measure output, the ABS also tries to measure “national economic wellbeing” using “real net national disposable income”. In effect, this tries to look at how economic growth translates into income.
And right now there is a historic disparity between output and income:
In the past 12 months GDP per capita grew by 1.8%, while real net national disposable income per capita fell by 2.4%.
Only three times in the past 40 years has income growth been so far below GDP growth – in December last year and in two quarters during the global financial crisis.
It helps explain why GDP doesn’t seem like a true reflection of the economy people are actually experiencing.
GDP is made up of consumption, government expenditure, investment and exports minus imports (net exports).
Consumption, government expenditure and investment combined is called “domestic final demand”, and here again we are seeing a large disparity between it and GDP growth:
Since the end of 2012, domestic final demand has been growing by less than 2% – a level not usually observed outside of a recession.
So why aren’t we in a recession?
Because of exports and imports.
As I noted at the time, GDP growth in the March quarter was effectively all due to net exports. But it is worth remembering that “net exports” is the sum of our exports minus our imports.
If we import less, that actually leads to a better GDP figure because less money is going out of the country. But when the volume of imports falls, that often means the domestic economy is actually weak – that was certainly the case during the financial crisis:
In June 2009, “net-export” growth kept Australia from having two consecutive quarters of negative GDP growth, but 70% of that growth was due to a fall in imports.
Essentially, because the economy looked like it was going to hell, businesses massively scaled back their orders for imported goods and capital equipment. As a result, GDP improved and we didn’t go into a “technical” recession.
At the moment imports are pretty flat, and exports are doing well – so it’s a good kind of net-export growth. But not all exports are equal, and in this case the export growth is not all good news.
At the moment our major export prices have been falling, so we’re seeing the volume of exports increasing (which helps real GDP growth), but the actual money we’re getting for those exports is falling (which hurts income growth):
The other problem with mining exports is that not only are they not delivering an income boost, they are effectively the results of production from a decade ago – so the jobs that led to the boom in exports have come and are already gone.
Gone as well are the profits and the resultant company tax. Company profits from the start of 2002 to the start of 2009 grew on average by 12.5% each year; since 2012 they have fallen on average by 2.5%. So this is the part of the mining boom that doesn’t see a boom in government revenue.
And yet, because of the volume of exports, the mining industry remains the most important industry for GDP growth:
In the past four years it has easily been the biggest contributor to GDP growth, and yet in the same period it has shed 40,000 jobs (about 15% of its workforce).
The second most important industry over the past four years for GDP growth has been the financial and insurance industry – an industry that employs less than 4% of all workers.
And here again the contribution of the industry demonstrates the disconnect of GDP with people’s experience of the economy.
A major part of the “output” of the finance sector that counts towards GDP is arrived at via a calculation that involves imputing the gap between the interest charged on loans and the interest banks pay on deposits.
Not surprisingly, as the debt held by Australians has grown, so too has the “importance” of the financial sector to GDP growth. As The Australia Institute’s Jim Stanford notes, it is “hard to believe Australians are being enriched by that component of GDP growth – quite the opposite, in fact”.
With GDP growth being powered by exports, via the mining industry, and the financial sector on the back of indebtedness, it’s little wonder that it seems out of whack when we hear that Australia’s economy is growing faster than most of the developed world.
We shouldn’t discount GDP as a measure of economic output, but right now it is very good at measuring things that don’t reflect the economics of most people’s lives.
