Australia’s headline economic growth was better than expected in the last three months of 2019, but our spending power went backwards.
Although real GDP grew by 0.5 per cent over the December quarter, nominal GDP dropped 0.25 per cent.
That means we are getting less for producing more, with ABS figures showing real net disposable income increased 2.7 per cent over the year but dropped 0.9 per cent over the quarter.
Centre for Future Work director Jim Stanford said falling economy-wide prices meant this trend would continue.
And he said ongoing deflation would “unleash all sorts of perverse behavioural responses, including escalating debt burdens”.
“The average prices in the whole economy declined by 1.23 per cent in the quarter – the second biggest quarterly decline in economy-wide prices in postwar history. The only one that beat it was the June 2009 quarter, at the worst stage of the GFC,” Dr Stanford told The New Daily.
“That shows the future trajectory of the economy is very much in question, as when prices are falling, people tend not to spend – whether that’s businesses, export customers, or even consumers – because a, they are worried about a recession, and b, they think something will be cheaper in the future so why not wait.”
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Annual growth also left a lot to be desired.
Not because the headline figure was particularly weak (2.2 per cent), but because the domestic private sector contributed no growth whatsoever.
That means the economy only grew because governments spent more and miners experienced a short-lived resources boom. (And big miners don’t pay tax.)
Meanwhile, households struggled to make ends meet.
Faced with low wages growth and economic uncertainty, they cut back on spending and used last year’s tax cuts to pay off some debt.
Weak consumer spending then fed into weaker business investment and rising unemployment, with the retail industry particularly hard hit.
ANZ senior economist Felicity Emmett said the domestic private sector consequently contributed no growth whatsoever in 2019.
She told The New Daily that government spending contributed roughly 1.1 percentage points towards the annual growth figure of 2.2 per cent, net exports contributed the other 1.1 percentage points, and the domestic private sector contributed nothing.
The latest figures don’t include the impact of the bushfires or coronavirus outbreak, either.
Ms Emmett and her colleagues said at the beginning of February that the virus would likely cause Australia’s economy to contract 0.1 per cent over the first three months of the year.
But she said recent developments pointed to a more serious economic hit than previously anticipated, with the risk of recession rising every day the virus continued to spread.
“We’re seeing [the coronavirus] spread to other countries, so that initial hit from tourism is going to be wider because it’s not just going to be Chinese tourists [not coming to Australia],” Ms Emmett said.
“But, I think more importantly, what we’re seeing is some wider economic effects – so we’re seeing supply chain reduction and we’re also seeing the effects in terms of domestic demand, in that people aren’t going to restaurants or public events.
“And those things will hit consumer spending and hit the economy quite significantly in [the first quarter] and with the potential now for that to drag into [the second quarter].”
Describing the coronavirus as the “greatest danger” to the world economy since the GFC, the OECD said the outbreak could halve global growth this year and shave half a percentage point off Australia’s annual growth.
It said the Australian government had enough money in the bank to announce a major stimulus package “without endangering debt sustainability”, and encouraged leaders the world over to respond swiftly.
Treasurer Josh Frydenberg has said the government is working on a “targeted, responsible and scalable” stimulus package to keep firms in business and workers in jobs.
But he has ruled out a GFC-style response worth billions of dollars.
Some economists argue that this is wise given Australians might not spend the cash they receive from government.
Others believe the challenges facing the economy are so grave that more stimulus is needed to get consumers spending and businesses investing.
Industry groups have called for a business investment allowance, which the Treasurer has said is “under very serious consideration”.
But Dr Stanford said the situation required a more “ambitious and aggressive response”.
“We need the government to jump in with both feet – with income support, expanded public services, measures to boost wages instead of suppressing them, and serious infrastructure spending,” he said, adding that public spending on infrastructure flatlined over the December quarter.
More broadly, income support is an issue anytime someone is unemployed, so we would benefit immensely from a straight-up lift in Newstart. It’s been frozen in real terms for just about three decades.”
Industry Super Australia chief economist Stephen Anthony, who predicts the unemployment rate will rise to 6 per cent this year, said the reduced effectiveness of rate cuts further underscored the need for more government action.
“Overall, the December quarter 2019 National Accounts outcome does not support the hope for a ‘gentle turning point’ or upswing, especially given the subsequent devastating bushfires and a downturn in private construction,” Dr Anthony wrote in a note.
“In terms of formulating policy response it would be appropriate for the Federal Government to convene an economic summit in Canberra to discuss key reform priorities – the old adage goes, ‘don’t waste a crisis’.”
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