Why the Australian economy is better than GDP suggests

About the author:

Michael Knox
Author name:
By Michael Knox
Job title:
Chief Economist and Director of Strategy
Date posted:
20 June 2019, 3:20 PM

On 5 June 2019, the Australian Bureau of Statistics released GDP numbers that told us that GDP had only grown by 1.7% for the year to March 2019 on a trend basis and 1.8% on a seasonally adjusted basis.

These low numbers shockingly suggested that Australia was growing at just above recession terms. These growth numbers were perhaps the lowest since the financial crisis of 2008/09.

The same publication, however, told us that in current prices or ordinary dollars terms, the Australian economy had grown much more rapidly, with a growth rate in trend terms for the year to March 2019 of 5.0%.

It also shows a growth rate in seasonally adjusted terms of 4.9%. In dollar terms, the growth in the Australian economy looks pretty good.

It appears the Statistician had to use an inflation number of 3.3% for the trend data and 3.1% for the seasonally adjusted data.

However, we know that back on 24 April the Statistician also told us that CPI inflation for the year to March 2019 was only 1.3%. The fact that CPI inflation is so low is one of the reasons that the Reserve Bank of Australia is cutting interest rates.

If the Statistician was using the CPI inflation rate of 1.3% in a situation where trend GDP growth rate in current dollar terms was 5.0% it would lead us to assume that the real GDP number was 3.7%, and not 1.7% on a trend basis.

It would also suggest that real GDP would be 3.6% on a seasonally adjusted basis and not 1.8%. So why is the Statistician using a rate of inflation that seems too high? The answer can be found by looking at the statistical convention that underlies the calculation of gross domestic product.

Gross domestic product is not designed to give us a measure of the output of the economy as ordinary people experience it. It is designed to produce an estimate of the physical quantity of output of the economy.

This means both the output that is consumed domestically and the output that is exported. This inclusion of exports and export prices in GDP begins to give us an insight of why the measure that was published about the Australian economy for the year to March is so misleading.

To calculate the volume of Australian exports for the period the Statistician divides the total dollar value of exports by the much higher inflation number of 11.8%. This high number is then included in the GDP deflator to give a much higher level of inflation than ordinary people in the economy experience.

Simply put, a commodity price boom in Australian export prices is generating a GDP deflator, which is much higher than the level of inflation that ordinary Australians experience.

Real Gross Domestic Income

What we have learned so far is that the way prices are calculated within GDP can give us a very misleading understanding of the actual state of the Australian economy.

The bottom line of the table on page 1 of the ABS release of 5 June shows real net national disposable income. In trend terms, this was up 3.3% for the year to March, in seasonally adjusted terms is up 3.0% for the year to March.

This measure provides us with a much better sense of the growth in income in the Australian economy, as it is being experienced by the ordinary people in it.

This measure tells us that domestic growth is actually better than 3% (not less than 2%).

Therefore, we can see why the government is receiving a higher stream of tax income and the federal budget is trending towards surplus.

What needs to be done

Our examination tells us that the actual state of the economy is far better than that suggested by the GDP number. This added confidence in the Australian economy may not be enough to carry us through the next few years of the Morrison Government.

Reserve Bank Governor, Mr Phillip Lowe has told us that individual households are paying too much tax.

This means that we need to enact tax cuts not just for the short term but for the medium term as well. Ian Harper (who sits on the reserve bank board) has developed a program of micro economic reform which has been blocked by a fragmented senate these past few years.

Parliament needs to enact Ian Harpers program of structural reform to improve the productivity of the Australian Economy and support its medium-term growth.

In addition, more work needs to be done on infrastructure both to support transport and power generation.

Individual tax cuts

The economy is better than the GDP numbers suggest. We think the number of 3.3% growth in real gross domestic income provides a much clearer picture of what is actually happening. Over the next three years, however, the Morrison Government needs to cut individual taxes to increase domestic demand.

It needs to enact structural reform to support productivity and medium-term growth. It also needs to support an expansion of Australian infrastructure.

The economy is much better than the GDP suggests, but there is still much to be done.

More information

If you would like would like more information, please speak with a Morgans adviser, or contact your nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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