It's the economy, stupid!

No big surprises in the GDP numbers

In the world of macroeconomic data and policy, this is an important week. Yesterday saw the latest monetary policy decision from the Reserve Bank of Australia (RBA), while today the Australian Bureau of Statistics (ABS) has released its latest Gross Domestic Product (GDP) data. But neither looks likely to affect the election. Yesterday’s monetary policy decision from the Reserve Bank was studiedly neutral, and today’s GDP data contain no surprises either. Still, even if the data are unlikely to sway many voters, they do provide the most current read that we have on the overall health of the Australian economy.

Overall, GDP grew (on a seasonally adjusted basis, after correcting for inflation) by 0.6 percent in the second quarter of the year and by 2.6 percent over the last year. Though it was slightly above the consensus forecast, there are no big surprises in this number: it reveals an economy that is still growing at a respectable pace, yet below the generally accepted trend growth rate of around 3 percent or so.

Looking at the expenditure numbers, household consumption expenditure is continuing to grow at a modest pace: up 0.4 percent for the quarter and 1.8 percent for the year (the flip side of this is that the household saving ratio is up very slightly, at 10.8 percent). Government consumption was up 0.8 percent for the quarter, and 0.3 percent for the year. The main increase on the expenditure side came from private capital formation, which was up 5.9 percent for the quarter. However, public capital formation was down almost 29 percent for the quarter. Taken together, these two almost exactly cancelled out in terms of their effect on GDP growth. Thus, even though we are – as we are constantly being reminded – nearing the end of the mining investment boom, private investment is still holding up. Changes in inventories were small in the second quarter.

Looked at from the production side, the main contributions to the growth came from the mining and finance industries. Mining contributed more than 0.1 percentage points of the quarterly growth total. In fact, about half of the growth in output in the last quarter (0.3 percentage points) can be attributed to iron ore production alone, with financial services growth contributing another 0.2 percentage points. On an annual basis the numbers are not quite so stark, but mining and financial services together account for 60 percent of total growth over the last year.

These are not numbers that are will affect the election. There is no headline number to grab the news cycle, and nothing that seems likely to change the overall economic narrative. The public’s overall sense of the economy – which is probably influenced by personal experience as much as it is by data like these – is not going to be changed by these numbers from the ABS.

It is, however, worth putting these numbers in a broader context. As several commentators have recently pointed out, there should be little argument with the view that Australia weathered the global financial crisis very well. Though we read the news from Europe and the United States, it is easy for us, here in Australia, to be unaware of just how bad the Great Recession was in most of the developed world, and how unusual Australia’s experience was.

The chart below provides one more illustration of this. It shows the relative performance of real GDP per person – the most broad-based measure we have of overall material prosperity – in the twelve richest large economies. (More precisely, I took the 20 largest economies in the world in terms of GDP on a purchasing power parity (PPP) basis, and then selected all of those economies which had GDP per person in excess of USD 20,000 or its PPP equivalent. Real GDP per person is indexed to 100 in 2007 for all countries. All data are from the World Bank.)

The most striking fact is that, by this measure, eight out of the twelve countries were still worse off in 2012 than they were in 2007. Only Korea, Saudia Arabia, Australia, and Germany had higher GDP per person in 2012 than they did five years previously. The United States, Canada, Japan, and all the European countries apart from Germany had failed to recover to pre-GFC levels. Seen in this context, Australia’s performance is truly remarkable. Only South Korea and Saudi Arabia have performed better.

The amount of credit due to Rudd and Gillard is a separate question. One of my fellow commentators here, Fabrizio Carmignani, has argued that Australia performed better, by several measures, than a composite benchmark economy, and that this was almost certainly in part due to the fiscal stimulus put in place. Another of my colleagues here, Sinclair Davidson, is more sceptical, arguing that the recent statistics on youth unemployment and on living standards (relative to expectations based on pre-GFC performance) suggest failings of the Labor government.

There were certainly many factors contributing to Australia’s success. The monetary stimulus enacted by the RBA played a role, as did the strength of demand for Australian exports. Business and consumer confidence, both of which recovered rapidly after the fiscal stimulus in 1999, were important as well. We cannot know with any real certainty how big a role Labor’s fiscal policies played, either directly, or in terms of their indirect effect on consumer and business confidence. But I agree with Fabrizio that there is, at the very least, no basis to the claim that Labor mismanaged macroeconomic policy during the financial crisis. Maybe we were just lucky. But, at a time when many other countries certainly did mishandle their macroeconomic policy-making, Australia still looks like one of the few places that got it right.