The March GDP figures released yesterday showed growth in the first quarter of this year was 0.9% in seasonally adjusted terms and a slightly more sober 0.6% in trend terms. Joe Hockey, as a treasurer must, talked up the figures, suggesting they were “a terrific set of numbers”. He also suggested that those who believe there are “dark clouds” ahead for the economy are “clowns”.



Well at the risk of going all Krusty the Clown, I’ll just note that the quarterly growth figures hide a lot of concerns with our economy. There is nothing very terrific about an annual growth of 2.3%.

Given economists were mostly predicting growth of around 0.7%, the figures were certainly better than expected, but a look below the surface finds not all is so bright and sunny.

Look at the quarterly figures for a better picture

GDP figures are notoriously backward looking. They measure what has happened and provide little in the way of predictions of the economy.

One way to try to predict what might happen is if you annualise the latest month’s growth and suggest what would happen if the economy kept growing for the rest of the year at the rate it did in the March quarter.

Given this quarter’s 0.93% growth, that would annualise to a fairly stunning 3.7% growth:

Alas, life is rarely ever so nice. Annualising growth is great if you are into jumping at shadows. The more sober picture is that in the past six months the economy grew by just 1.4%. Even if that continued, we’re only looking at growth of 2.8% – still below par.

If we look over the past year, the trend growth of 2.2% is quite dismal, and is down from the rather pathetic recent peak of 2.8% in the 12 months to June 2014:

The trend GDP per capita growth is equally sad and sorry. Annual growth has declined from 1.2% in June last year to just 0.7%.

The steadily declining trend growth shows just how out of step the March growth of 0.9% is. It may be turning a corner. It may see Australia surging ahead of the US and UK. But economies are notoriously hard and slow to turn.

The miserable nominal growth GDP growth (which uses current dollars) of 1.3% in trend terms highlights a weakness in the economy. The only time growth has been lower than that in the past 40 years is during the 1991 recession and during the GFC.

Any growth is all about exports

Now, more than ever before, our economy is dependent upon the good folk in China buying what we have to sell that comes out of the ground. Exports grew by 8.6% in the past year – the strongest growth in trend terms since September 2000:

Despite our terms of trade (the price of our exports compared with our imports) falling by 11.4% in the past year, the amount we are exporting is more than making up for it.

Net exports (exports minus imports) contributed 1.7 percentage points to growth this year. And given that growth was just 2.3%, it gives a fair idea of how important exports have become:

In the last quarter and the last year, net exports have contributed more than households or government consumption, or private or public investment:

The dependence of our economy on exports is made very clear by the growth of domestic final demand. This looks at the amount of demand for goods and services within Australia. In the past year this grew by a near recession level of 0.6% – the lowest it has been since the middle of the GFC:

Exports bring in income, but driven mostly by mining they are not producing an abundance of jobs or income outside of the mining sector.

For most parts of the economy, the past year has been terrible.

Mining is still a power, but no longer the king

There is no more mining investment boom, but the boom in exports means that mining remains a big driver of the economy.

In the March quarter, mining added 0.14 percentage points to growth. Over the past year, the industry added 0.5 percentage points to GDP growth.

But this was not the biggest driver – that title goes to the financial and insurance sector. It added 0.52 percentage points to growth in the past year, as well as 0.14 percentage points in the past quarter:

It was a close run thing, but for this quarter at least, finance beat mining.

What is interesting is that the construction industry was a drag on GDP growth over both the past quarter and past year.

Although we’re building houses, we’re no longer building mines and roads as we once were.

The housing boom continues, but so too does the fall in investment

In the March quarter investment in dwelling construction grew by a very sturdy 3% in trend terms and over the past 12 months it was up by 8.8%:

The RBA would love that, and it would certainly be a reason to keep interest rates on hold – the record low rates appear to be doing their work.

But private dwelling construction in March accounted for $20.5bn in real terms. That’s a heck of a lot of money, but it is not enough to make up for the drop in non-dwelling construction from $35.2bn three years ago to the current level of $29.8bn.

The end of the investment side of the mining boom continues apace. It is why total private investment over the past year was once again a drag on GDP growth:

Over the past year, private capital formation (essentially business investment) fell by 2.2%, but the public side of things has not been helping out either. Public capital formation fell by 11.8% in the past year – reflecting the drop in government infrastructure spending in that time:

Time for the infrastructure prime minister to get out the shovel and start digging.

Western Australia is not in a recession, but it might feel like it is

State final demand does not include exports, which clearly means a chunk of Western Australia and Queensland’s economic activity is missing. But as The West Australian’s Shane Wright noted, “most people live in a state final demand world”.

If there is demand for goods and services, that means someone is being employed to make use of those goods and services. If demand is falling (as it is in WA) then the demand to employ people to use those goods and services is also likely to fall.

If you’re not a shareholders of a mining company, then BHP earning export dollars might not be such great news – especially if you don’t have a job because they no longer need to employ as many people to build mines as they once did.

When WA was thought of as the boom state, it was because state final demand was booming – that boom meant great demand for jobs and also for housing and all other things that suggest an economy is growing strongly.

So while state final demand should not be used to suggest whether or not a state is in recession, it can give a good picture of how those living in the state might feel when they look at the state of the economy around them.

In the past year Western Australia final demand fell 4.1%. Queensland, the other mining state, saw its final demand fall by 2.8%. New South Wales and Victoria by contrast experienced growth of 2.5% and 2.7% respectively:

When it comes to contributing to GDP growth, New South Wales and Victoria are doing the heavy lifting, contributing 0.7% points and 0.6% points to GDP growth respectively in the past year. Queensland and WA, on the other hand, were a drag on GDP growth of 0.5 % points each.

Thank god for their exports though.

We love to spend, but not really on things we love

After exports, household spending was the biggest driver of GDP growth. In the past 12 months household consumption grew by 2.6% – not record levels by any means, but still very solid:

But what are we spending our money on? Clearly unemployment is not great and, as we shall see, wages aren’t rising. So why are we feeling flush?

Well we seem to be spending less on luxuries.

The big drivers of household spending in the March quarter were rents and insurance.

The third biggest driver was money spent on recreation and culture.

Since 2001, Australians have always spent more on recreation than on insurance (in real terms). The way insurance spending has increased, that will soon be reversed.

Overall the biggest growth in consumption was in furnishings and household equipment, and the biggest fall was once again on cigarettes and tobacco.



The volume of tobaccos products consumed over the past year fell 11% in trend terms:

Workers are receiving and producing less for their labour

The real dire state of the economy is perhaps best revealed by the inflation measure for GDP figures. For the fourth time in the past five quarters the GDP price deflator fell. In the March quarter the value of prices used to measure GDP fell by 0.5%, and by 1.1% over the past year.

With no demand in the economy there is no pressure on prices to rise because people and businesses are not actually buying that much.

For real labour cost to fall, wages need to fall by even more than falling prices.

That’s a tough ask.

In the past year nominal labour costs fell by 0.5%, but because prices fell by only 1.1%, that absurdly means the real cost of labour in Australia increased by 0.6%:

Business and business friendly media outlets might blame unions and the recent 2.5% increase in the minimum wage for hurting Australia’s competitiveness.

But in reality, the lack of economic demand means that even with unprecedented low wages growth, our competitiveness will fall.

What is more concerning is that productivity appears to have peaked. GDP per hour worked fell in seasonally adjusted terms in the March quarter and grew by just 0.1% in trend terms.

The past year saw labour productivity grow by just 0.9%. The five year average annual growth of 1.6% is nice enough, but it is heading in the wrong direction.

These things have a habit of going through peaks and troughs, but we don’t want to fall in any deeper.

With such weak demand in the economy, the value of our exports falling, and the value of our dollar making it harder for businesses to be competitive with the rest of the world, productivity growth is the big driver of living standards.

And if that falls, you’ll be hard pressed to find anyone, let alone the treasurer, describing the GDP figures as terrific.