The Australian Bureau of Statistics (ABS) released the National Accounts for the December 2011 quarter this week. The results continued a downwards quarter-on-quarter trend in weaker economic growth across Australia. Gross Domestic Product (GDP) is defined as the total market value of goods and services produced in Australia within a given period after deducting the cost of goods and services used up in the process of production but before deducting allowances for the consumption of fixed capital. Essentially it measures the size of the Australian economy and measures whether the domestic economy expanded or contracted. Over the December 2011 quarter the economy grew by just 0.4% after increasing by 0.8% in the September 2011 quarter. Over the 2011 calendar year, the economy grew by 2.3%; a rate of growth which is below the long term trend of 3.4%.
A recession is technically defined as two consecutive quarters of negative economic growth. As the above chart highlights Australia hasn’t recorded a recession since the June 1991 quarter (the recession we had to have according to Paul Keating). Over the past 20 years, the average annual rate of economic growth has been recorded at 3.4%, as you can see economic growth is currently more than a full percentage point below this 20 year trend. In fact, the annual rate of economic growth has consistently been below this trend level since the December 2007 quarter, four years ago and right before the onset of the Global Financial Crisis (GFC).
One of the many reasons why economic growth has been slower since the onset of the GFC can be attributed to the increase in the household savings ratio. The latest data shows that the household savings ratio is currently sitting at 9.0% and although the ratio has eased somewhat in recent quarters it remains at much higher levels than what has been recorded over recent years. Over the past 20 years, the household savings ratio has been averaged 4.5% indicating that current household savings levels are double the long-term average. As mentioned, economic growth has been below average since the December 2007 quarter and since the December 2007 quarter, the household savings ratio has averaged a much higher 8.8%.
Obviously, there are many other factors that impact economic growth however, if households are saving money rather than spending money there is a flow on effect right across the economy; lower demand for retail and manufactured goods and lower demand for housing (purchase and construction). The table below highlights how certain industries have really felt the effects of the slowdown since the onset of the GFC and subsequently since Australian’s started saving more. Although certain industries have shown very low levels of expansion over the period, others – more essential sectors of the economy – have continued to expand.
Overall, less spending by Australian households has flow on affects right across the economy. It also appears that a greater level of saving is a direct contributor to lower levels of economic growth. There are other factors to consider such as the higher Australian dollar and the weakness emanating out of other international economies to consider as to why economic growth has been slower. In stating this, it appears that industries such as accommodation and food services, manufacturing, real estate and retail are likely to continue to underperform until such time as Australian consumers once again show a preparedness to spend their disposable income.
Recent forecasts from the Reserve Bank within their latest Statement on Monetary Policy suggested that annual GDP over the December 11 quarter would be 2.75%, higher than the 2.3% recorded. Their forecasts also show that they expect that GDP will grow between 3% and 4% on an annual basis to the June 2014 quarter. Given that their recent forecasts have been a little high and they have commented that the Australian economy is growing at a trend rate (when it hasn’t been) we’d like to find out from you how you think Australia’s economy will perform over the next few years.