It’s a measure of just how poor the economy is at the moment that the latest GDP figures released by the Australian Bureau of Statistics, which saw the economy grow by a mere 0.5% in seasonally adjusted terms in the December quarter, were pretty much right in the middle of market expectations.



In trend terms, the economy grew by just 2.3% in 2014, and yet this announcement saw barely a shift in the value of our currency. The market knows the economy is weak and they know that the Reserve Bank, despite not cutting rates on Tuesday, will do so soon.

So what is in the national accounts? Let’s put the Australian economy on the table, get it to open, say ahhh, and find out just what is going on.

1. Weak growth; getting weaker

You don’t mind the occasional weak quarter of growth, but we’re making a habit of it. Six of the past 10 quarters have seen the economy grow by 0.5% or less.



When you consider that we need the economy to grow by around 3.1% just to stop the unemployment rate from rising, quarterly growth of 0.5%, which annualises out to just 2%, means grim times for jobs:

The December Mid-year economic and fiscal outlook (Myefo) predicted real GDP would grow by 2.5% in the 2014-15. In the first six months of that period it grew by just 0.87% - on track for annual growth of just 1.7%.

And nominal GDP, which is the better for estimating taxation revenue, grew by just 1.6% in 2014 – the worst result since during the midst of the GFC. The Myefo estimated nominal GDP in 2014-15 would grow by 1.5%, at the moment it is on track to grow by just 0.8%. If that weak growth remains, it’s very likely Joe Hockey will see a revenue shortfall in the May budget from what was anticipated in December.

2. Exports prices down, but volume is up

Some goods news within the figures is that despite slumping prices of commodities, our exports volumes are still doing well:

Exports grew by 7.2% on seasonally adjusted terms in the past year, and by a slightly less exuberant 5.3% in trend terms.

And while our terms of trade – which measures the price of our exports compared with our imports – fell nearly 10% in trend terms over the past year, the fall was not as bad as might have been expected due to the fall in the price of oil, which we import.

And thus our net exports (exports minus our imports) contributed a solid 1.4 percentage points to annual growth. This was not as strong as in the last quarter, but overall the contribution of net exports looks be holding quite steady:

And yet, it was not the biggest driver of growth ...





3. Ching! Ching! Ching! We’re spending big

Yes, the economy is weak, but Australians are spending quite impressively. I honestly have no explanation. Consumer confidence is low, wages growth is pitiful, unemployment is rising, and retail sales data is pretty limp – and yet household final expenditure grew by 2.7% in the past year – the strongest growth since 2011:

Household consumption actually contributed the most to trend growth in the past quarter and year – more than that of net exports:

And what are we spending on? Would you believe it is recreation and culture?

In the past year, growth of spending in that area contributed 0.5 percentage points towards the 2.7% overall consumption growth. It was effectively tied with spending on rents and that spent in hotels, cafes and restaurants:

Going by these figures we’ve all decided to go out to the movies and concerts, stay a night at a hotel, have a meal at restaurant before going home to our house – the rent for which seems to be climbing more than we would like.

One thing we’re not doing is smoking. Consumption of cigarettes and tobacco fell by 8.9% in trend terms. That ties with the third biggest fall ever in smoking consumption (the two biggest falls occurred back in 1983 when Paul Keating linked the excise on tobacco to the inflation rate):

We’re also spending a lot more on communications than we used to – up 7.6%. But because we don’t spend as much on that as other items, growth in that spending only contributed 0.2 percentage points to overall household consumption growth.

4. Mining boom: thanks for coming

Does the December 2014 quarter mark the real end of the mining boom? In trend terms gross value added in the mining industry did not grow at all. As a result, despite still contributing the most to economic growth over the past year, in the last quarter it contributed nothing:

Within the mining industry, the big fall in the past quarter was coal mining and the oil and gas extraction sector – both of which saw gross value added decline in the December quarter:

But even the iron ore sector saw slowing growth and is coming off the boil quickly – quarterly growth of just 1.7% compared with the 5.6% growth observed in the March 2014 quarter.

For the future, it appears any joy from the mining sector will come via exports rather than production and investment.

5. Investment down; housing construction up, but not by enough

Maybe you have heard about the housing boom going on in Sydney and other parts of the country?

Well, yep, it’s a thing alright. Investment in private dwelling construction grew by 5.6% in 2014 – although it is down on the annual growth of 7.9% observed six months ago:

But while more dwellings being built is great for the economy – and vital given the end of the construction phase of the mining boom – at the moment it isn’t enough to offset the fall in investment in the mining sector.

Private dwelling investment is only around 60% the amount of non-dwelling construction investment (i.e. engineering construction). So while a 5.6% increase in dwelling construction is pleasing, it can’t make up for the 10.9% fall in investment in non-dwelling construction.

That fall took one percentage point off of GDP growth over the past year, whereas investment in dwellings added just 0.3 percentage points:

6. As goes mining, so goes demand in Western Australia and Queensland

In 2011 and 2012, Western Australia was the big driver of economic growth in the nation. State final demand in WA contributed a whopping two percentage points to annual growth in the 12 months to March 2012. Only NSW had ever contributed that much growth – and that was back in 1994.

But in 2014, the state final demand in WA took away 0.4 percentage points from Australia’s GDP – it was a drag on the rest of the economy. So too was Queensland:

But we shouldn’t get too down on those states. Final demand does not include exports, and clearly our exports are massively important for generating growth in the whole economy.

7. Labour isn’t working as much, but still as hard

The productivity and labour cost figures were a bit of a mixed bag. In the past quarter there was a fall in the number of hours worked (although oddly a rise in the number of hours worked in the market sector). It meant that GDP per hours worked grew by 1.7% in 2014 – up a bit from the previous quarter, but still down on where it was in 2012 and 2013.

The average over five years (which gives us a better indicator of how productivity is really growing) was 1.6% – just below the long term average of 1.7%. So it’s doing ok, but not much more than that.

When it comes to labour costs, the picture is also a bit mixed. Real unit labour costs rose in the past year. While this might suggest Australia is becoming less competitive because our wages and other labour costs are growing too fast, wages are growing by next to bugger all.

The issue is that according to the index used to measure inflation for the GDP figures, prices actually fell by 0.8% in the past year. It meant for real labour costs to fall, the nominal labour costs needed to fall by more than that. They didn’t – nominal labour costs fell by 0.1%:

That 0.1% fall is itself amazing. Over the past 15 years, nominal labour costs grew on average 2.8% each year.

The lack of growth in nominal labour costs in 2014 as much as anything reveals how weak the economy is going at the moment. There may be exports, but there is a lack of investment which is in turn leading to a lack of demand for labour.

It’s why the growth in consumption is so surprising, and why it would also be surprising were it to continue. There’s only so long you can keep increasing your spending, if your wages and hours working aren’t growing.