Let’s not settle for listless growth in living standards
The economy remains trapped in a malaise, unable to exceed 2 per cent annual growth in gross domestic product during the past two years.
It’s true we are outperforming many other rich countries in the wake of the big inflation and the tightening of the monetary screws by the world’s central banks.
Still, the Australian Bureau of Statistics reported on Wednesday that, other than the 2019-20 Covid-affected financial year, 1.3 per cent GDP growth for 2024-25 marked “the weakest year-on-year growth since the early 1990s”.
So the question remains: Are Australians prepared to settle for an idling economic engine, that is operating at two-thirds of the average speed we achieved in the years before the pandemic?
Population growth is no longer outpacing output, but it remains a close-run thing and there is a fair amount of catch-up to get the proxy for material living standards in positive territory.
Since mid-2022, the nation’s resident population has increased by an estimated 6.1 per cent, while GDP has grown by 4.8 per cent.
Thus, per capita GDP has fallen by 1.3 per cent. In fact, GDP per capita has increased in only three of the past 11 quarters.
While government spending looks to have peaked as a share of the economy, with public works and defence projects curtailed, the taxpayer is still on the hook for an ever-growing and labour-intensive care sector.
One third of the contribution to 0.6 per cent growth for the June quarter came from government consumption (wiped out by an equal fall in public investment), while two-thirds of quarterly GDP growth came from household spending.
Jim Chalmers insists the handover, which involves governments stepping back and the private sector stepping up, is working.
The Reserve Bank, too, is hoping the private sector drives growth because it’s central to its game plan of returning interest rates to a less restrictive setting.
Lower borrowing costs and tax cuts have helped consumers get back into the spending game, especially on non-essential items such as entertainment, clothing and furnishings.
Rate cuts have revived new home building and renovations, while residential property prices are again on the march.
Companies, however, remain shy of committing funds to expand their operations. This remains the weak point in the national accounts.
Business investment is stuck, literally, in the doldrums, unable to get wind in its sails.
As EY chief economist Cherelle Murphy notes, business investment in the June quarter was just 12.3 per cent of GDP. That’s lower than the March result and not far above the pandemic low of 11.1 per cent or the 1990s recession low of 10.6 per cent. For three years, company profits have been edging down as a share of the economic spoils and measured business confidence remains soft.
Apart from spending on computer software and new data centres, Murphy says the “the outlook remains mediocre across most other sectors”.
The RBA is likely to trim its cash rate a couple more times over the coming six months, which will help to drive consumer demand and, in turn, will give the private sector more reason to raise its productive capacity.
A recovery in business investment is fundamental to turning around the nation’s poor productivity, which has been stagnant for almost a decade.
Last month, the central bank’s economists pared back their assumption for annual productivity growth by the end of 2027 to 0.7 per cent, the 20-year average for non-farm activity.
With modest population increases of around 1.3 per cent a year expected, that implies 2 per cent growth for years to come.
Unless we change our ways, get used to such endless mediocrity.
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