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Economic and Financial Market Update: Behind the GDP numbers

11 March 2022

Summary:

The Australian economy has done relatively well over COVID by global standards;
Weaker productivity growth has become an issue over the past decade;
Government consumption has become a bigger part of economic growth over recent years;
Stronger investment should mean productivity will improve in coming years;
And this should result in stronger income growth.

By global standards the Australian economy has performed well through COVID. The massive fiscal and monetary support played an important role. But interestingly there looks to have been little correlation between the rise in national debt (and economic performance across economies. This suggests other factors have played a role in Australia’s strong economic performance.

While the Australian economy has performed well in aggregate outcomes have been very mixed between sectors. Agriculture has done best helped by good weather and being minimally impacted by COVID. Other sectors (retail, road transport) have benefitted from the switch in consumer spending from services towards goods. For some sectors (such as IT services) strength is a reflection of an ongoing trend (digitisation). For about one-third of sectors economic activity was lower at the end of 2021 than at the end of 2019. Mostly that was the service sectors most impacted by COVID.

Taking a longer lens the Australian economy has performed well for much of the past three decades. This is why Australia’s GDP per person (capita) is high by world standards. Since the end of the mining boom the growth of Australia’s GDP per capita has lagged the US. Partly that reflected some decline in the terms of trade. More important has been weaker productivity growth. Weaker investment spending was a key factor. This meant that consumption has to become an increasingly important driver of economic growth.

The good news is that strong economic growth and full order books has meant that firms are boosting the size of their capex budgets. This is in addition to the trend rise of spending on digitisation by many companies. Governments’ (particularly the states) are spending up big on infrastructure. The result should be stronger productivity growth in coming years. And that should mean higher income growth for Australia.