Australia’s economy is just fine, thanks.
How do we know this?
Well, the Reserve Bank’s May Monetary Policy Statement said: “More broadly, the Australian economy remains resilient and is expected to grow strongly this year. GDP is forecast to expand by 4¼ per cent over 2022.”
And the former treasurer Josh Frydenberg in March said: “The Australian economy has outperformed all major advanced economies, experiencing a stronger recovery in output and employment compared to pre-pandemic levels.”
So why, then, did Treasurer Jim Chalmers say last week that inflation is “skyrocketing”, that the “fiscal situation we’re inheriting is dire”, and that Australians shouldn’t underestimate the seriousness of the economic problems the nation is facing?
If you dig into the numbers, it’s easy to see the economy isn’t in great shape — which has implications for every Australian.
Let’s explore that.
The economy is in neutral
When a treasurer informs the nation of how the economy is progressing, they refer to the work of the number crunchers at the Treasury.
In March, the Treasury stated: “Economic growth forecasts have been revised upwards, driven by stronger than expected momentum in the labour market and consumer spending.”
“Real GDP is expected to grow by 4.25 per cent in 2021-22, 3.5 per cent in 2022-23 and 2.5 per cent in 2023-24.”
Those forecasts were perfectly valid, but are they accurate?
We know consumers — or shoppers — are driving the economy forward, but is that sustainable?
I ask that question because we know consumers are dipping into their savings before they venture out to shop, and there’s a limit to how long that can last.
“Saving rates are still high but are mainly held by higher-income families,” the National Australia Bank’s (NAB) chief economist Alan Oster says.
“As such, they have helped consumer spending but … more importantly the rebound in hospitality from the weakness in January from Omicron has underpinned consumption spending in the first half of 2022.”
In other words, along with many households spending some of their savings, just being able to get out and about has prompted people to spend.
Gross domestic product or GDP — which is how we measure how well the economy is performing — is derived by adding consumer spending, business spending, government spending and the contribution from the export sector.
So aside from consumer spending, what else is driving growth?
Beyond consumer spending
Again, according to the NAB, “partial indicators suggest that dwelling and business investment were both largely flat as capacity constraints including labour and materials shortages affected activity.”
That leaves government spending and the export sectors as areas of the economy that can provide “growth”.
The government is now very limited in what it can do in terms of spending.
Speaking to Insiders on Sunday, Katy Gallagher made it clear that Labor would make some tough fiscal decisions in the coming months in order to bring the budget back to a position where debt becomes manageable.
“The time for due diligence and proper fiscal discipline is here and I’m going to make sure as the Finance Minister that we’re doing that from the get go,” she said.
Meanwhile, the export sector — which depends on China’s economic success — faces, according to NAB, growing “risks to global growth … with China’s GDP expected to decline in the quarter on the back of COVID-related lockdowns and risks around growth in the US, UK and Europe.”
Investment bank Barclays had a similar warning.
“A marked contraction in China’s April activity and our high-frequency tracking suggest a narrower-but-continued year on year decline in May,” they said.
In other words, the economy of Australia’s largest trading partner is expected to go into reverse in May.
If you combine all of these GDP ingredients you can see why many believe the economy is stalling — or growing, but only ever so slightly.
We’ll find out the exact figure on Wednesday morning from the Australian Bureau of Statistics.
But, in the meantime, AMP says the “March quarter GDP is expected to be flat”, while the NAB has the economy growing at 0.1 per cent for the quarter.
Investment bank JP Morgan has the top growth forecast so far of 0.5 per cent.
The crucial point here is that Australia’s economy is neither strong nor on any kind of sustainable growth trajectory.
Not to mention the other risks
Australia’s economy is also wrestling with stubbornly stagnant wages, “skyrocketing” inflation, and rising interest rates.
Millions of households across the country may also be sitting down, looking at their budgets and working out whether they want to continue to have slightly less in their bank account each month or cut back on spending.
If it’s the latter, that will eat into GDP, or economic growth, because it will mean less spending at the shops.
Indeed if the federal budget is really in a “dire” state, the government may ultimately be forced to crimp spending further by raising taxes and cutting spending.
The fear for more vulnerable Australians is that the spending cuts will be made to essential services.
There are plausible reasons to “talk up” the economy and its prospects — if nothing else it might boost consumer confidence — but shouldn’t we accurately assess how we’re positioned first?
A better economic future needs a firm starting point.
Is there firm agreement on that?
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