The news that Australian GDP fell 0.3% in the March quarter is bad. We need the government to ramp up investment.
The latest GDP figures released on Wednesday by the Australian Bureau of Statistics revealed that in the first three months of this year, Australia’s economy shrank for the first time in nine years and removed any lingering doubt that we are in a recession.
By Greg Jericho
The headline news is that Australia’s GDP fell 0.3% in the March quarter – the first fall since March 2011 when Cyclone Yasi and the Queensland floods knocked the economy back a peg.
Because the Treasury and every economist expects the June quarter to be worse, this means Australia will inevitably suffer a misnamed “technical” recession of two consecutive quarters of negative growth.
The reality is, as the treasurer Josh Frydenberg confirmed on Wednesday, we already are in a recession. When the underutilisation rate rises 6.8 percentage points in one month, anyone who thinks we need to look further to work out whether or not we are in a recession must ask themselves what they think a recession actually is.
The figures also revealed GDP per capita fell in the past year – the first time that has happened since the GFC:
The story of the economy in the March quarter is that of three things – government and household spending, and imports.
Households make up roughly 56% of our entire economy, so when we stop spending, our economy is in big trouble. And in the March quarter we really stopped spending.
Household consumption dropped 1.1% – the biggest one-quarter fall since 1986, and our annual growth of spending fell 0.2% – the worst fall since the GFC:
As bad as that is, we should not forget that things were not good even before the virus. It has now been more than eight years since our spending growth has been above the long-term average. And even before the start of this year it was dropping.
Our panic-buying kept the figures from being even worse than they might have been. Household spending on food grew 5.7% in the March quarter – the biggest ever quarterly growth recorded by some distance:
While our drop in household consumption was astonishing, the reason that massive decline is not fully reflected in the overall GDP figures is because of the two other parts of the story – government spending and imports.
While other aspects of the economy were falling, government consumption added 0.3 percentage points to GDP growth and imports added a massive 1.3 percentage points:
The reason imports added to growth is (confusingly) because imports actually reduce GDP. When we import something that is money going overseas and so it reduces our economy. But when the amount we import falls, then that actually helps increase the growth of GDP.
In March both imports and exports fell, but imports fell by much more:
This is why economists and the treasurer can say “net exports” added to GDP growth. It is not because our exports increased, but that they fell by less than did our imports.
Imports falling is not actually a good sign. While imports alone might cause our economy to shrink, what they are used for does increase our economy. So as a rule when imports fall it is because both households and businesses are less inclined to spend money – and that is not good.
The final aspect of the story is government spending.
If we took away the amount the government contributed to the economy, our GDP would have fallen not by 0.3% but 0.7%.
And if you take away the impact of our trade, the economy would have shrunk by a stunning 1.1% in the March quarter.
As it is the domestic private sector has shrunk 1.4% over the past year – again the worst result since the GFC, but given how poorly it was performing in the past 12 months, not wholly unexpected:
But while total government spending has improved our economic growth, overwhelmingly it has come from consumption – things like spending on NDIS, and on government wages and support.
Government investment growth was decidedly muted – and has been so for some time now:
Government spending on benefits helps stabilise the economy, but if you want it to grow long term you need to improve its productive capacity – and that comes through investment.
And so if we are to have any hope of recovery, and if we want that recovery to lead to long-term benefits, then we need the government to ramp up investment and ramp it up quickly.
Wednesday’s figures are bad but worse is yet to come, and the path to recovery will be long and it should be paved with public investment.
First published at The Guardian Australia – Thursday 4 June 2020. See; https://www.theguardian.com/business/grogonomics/2020/jun/03/yes-australia-is-in-a-recession-but-worse-is-yet-to-come