Australia’s economic growth forecast was slashed by 0.5% in December. The Mid Year Economic and Fiscal Outlook (MYEFO) took the knife to GDP, forecasting it will reach just 2.25% over 2019-20. But to do even that, GDP has to lift from its current below trend 1.7%. That is way below the level required to achieve the dual objective of lifting both employment levels and wages.
As the chart below shows, Australia’s GDP growth was just 0.4% in the September quarter, fuelled mainly by government expenditure and exports, as the next item in this edition of Stats Count details.
At an annualised 1.7% – despite the lift from 1.6% for the year-ended June – it is very difficult to see how the Australian economy will reach 2.25% GDP growth for the full 2019-20, let alone anything better than that!
To go straight to the dashboard and take a closer look at the data, click here.
In sure signs of troubles still to come, the MYEFO alters many of the assumptions and forecasts for economic activity over 2019-20. Beyond the GDP headline and possibly most worrying, the Government has revised down its forecast for wages growth. In the last Budget, it boldly predicted wages growth would reach an annualised 2.5% by now. It is at a markedly different 2.25%, and instead of reaching 3% in a year’s time, it is now predicted to be just 2.5% in 2020-21.
That is just about the rate of inflation and possibly below it. That means even if it is achieved, households will have no additional capacity to spend and consume, which in turn is at least a drag on future economic growth. What is more, it doesn’t add much to the productive economy, and so does not assist in providing new employment opportunities.
We can easily observe in the chart below, the stress on Australian households, whose wages growth has generally been suppressed for most of the last decade. It shows the continuing declining in the household savings ratio until the uptick in the last quarter.
How could that have happened if wages have grown at or below the rate of inflation?
The answer is that the nation largely banked the small (to smallish) tax cuts in the middle of this year.
To go straight to the dashboard and take a closer look at the data, click here.
The seasonally adjusted household savings ratio ticked up to 4.8%, but the risk is that it is a ‘dead-cat bounce’ and will drop again in the absence of meaningful wages increases or other stimulus. Again, this little tick up is essentially the result of the tax cut being deposited into the family war chest.
There are further pointers to the need for stimulus of some type to get the economy moving again. Some of these are addressed in the next item in this edition, but this next chart also provides a solid clue. It displays the ratio of household debt to household disposable income. At 191.1%, that ratio has never been higher. It also displays the ratio of household debt to income, which averages a lower 140.4%. Another record and not one of which we ought to be especially proud.
At the housing level, the cost of home loan interest as a ratio of disposable income is currently around 7.4%, down from its peak of around 9.25%.
To go straight to the dashboard and take a closer look at the data, click here.
These are fragile figures for the Australian economy. They mean that a lot of household income is fully committed. What if interest rates rise or unemployment rises, or both occur simultaneously? The short answer is that plenty of households will be under the types of stress that mean – at its simplest – they will consume less, because they have less disposable income.
That is the big risk in the Australian economy right now.
So while the economy is not negative the challenge is how do we get some forward momentum.
Senior economists like Westpac’s Bill Evans said further stimulus is required. He noted with an economist’s shrug that stimulus like bringing forward the second and third tax cuts would place the budget back into deficit.
So keen judgement is required. On the one hand there are benefits in terms of moving the budget into surplus. However that would count for nought if the economy was to further contract.
As The Guardian’s Greg Jericho wrote, joining the chorus calling for stimulus and deficit, after the MYEFO release:
“All the figures show an economy as weak as we have seen since the 1990s recession. But whereas in previous lean periods such as the Dot Com crash in 2001 or the GFC the government used the budget to help stabilise growth (by allowing a deficit in 2001-02 or stimulating the economy during the GFC), here we see a government addicted to its surplus.”
Jericho points out that MYEFO slashed the surplus for 2022-23 to AUD4 billion on stumbling revenues of AUD554 billion. That is like giving your child $10 for an ice-cream, demanding the change and being shocked when all you get back is a bent ten cent piece.
The problem with that 10 cents is that it is wholly useless. And in an economic sense, just like the child, we would be better off spending the AUD4 billion surplus also.
The MYEFO tells us that is the position we are in right now.
There is little doubt that the 2019 MYEFO is a current low-point for the economy. It marks the troubles to date and just happens to come right as economic growth eludes the nation. More specifically, it charts a worrying course for the remainder of the financial year, and beyond, because of the flow-on and longer term effects of forecasts for key indicators turning sharply down.
