Will Australia’s rate of economic growth improve in 2012?

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.

About Cameron Kusher

Cameron Kusher is Head of Research at CoreLogic, specialising in primary and secondary data analysis, property market commentary and consultancy. Cameron has a thorough understanding of the fundamentals such as demographics, trends, economics and spacial analysis and is a regular keynote speaker for property-related groups, regulated industry bodies, corporations and the government sectors. Follow Cameron on Twitter @cmkusher

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4 Responses to Will Australia’s rate of economic growth improve in 2012?

  1. Chris Stavenhagen March 12, 2012 at 7:31 am #

    I would like to put forward the notion that the savings referred to here are not real cash savings in toto. Sure people have chosen to pay down discretionary debt and where possible retire mortgage debt, however what is not referred to is the increasing cost of services such as power and water the increases in which may be attributed in great part to increased taxes on the provision of such services. The carbon dioxide tax will also markedly increase the tax proportion of price rises as is it not value added like GST but levied on every transaction as a pass on. This will severely impact on discretionary spending in the future. So my main point is that the increase in savings may well be illusory since the reduction in consumer spending will be caused in part by people spending more paying tax just to stay at their current level. Most people I speak to are still greatly concerned about job security and tax increases and their ability to fund such increases whilst maintaining their current standard of living; this is assuming that they stay employed. Whilst these factors may be considered as somewhat exogenous to the usual economic models I submit that such matters are worthy of consideration when attempting to explain current and near future consumer behaviour.

    • Cameron Kusher March 12, 2012 at 12:25 pm #

      Hi Chris

      I certainly agree, the uncertainty in the economy is a major factor driving the change in consumer spending patterns. Also, over recent years we have generally binged on spending and how many televisions, computers, phones, cars, houses etc do you need?

      At some point you have what you need and need to start making plans for the future. I think this is what we are seeing currently, consumers are saying they don’t need much more than they already have and now its time to get your debt to more manageable levels. Especially in light of global economic uncertainty, a lack of job security and the likelihood of further increases to the cost of living.

  2. Scott Taylor March 12, 2012 at 12:04 pm #

    Cameron, did it ever occur to you that the rising savings rate is a direct result of the sharp rise in house prices since the late 1990’s. Up until then, young people buying a house didn’t need particularly large savings but now a 10% deposit will typically set you back $40,000 to $50,000 and a 20% deposit (to avoid mortgage insurance) double that. Obviously, with Generation Y and a large part of Generation X saving at these high rates to buy a house, I say, get used to the high savings rate. You can’t have it both ways – high house prices strain every other part of the economy, not only with high savings rates to fund the initial deposit but also the higher mortgage payments throughout the life of the mortgage. And did it ever occur to you that a higher savings rate in a capital hungry country like Australia is actually a GOOD thing, not a bad thing. It enables us to fund our own investment and underpins HIGHER in every year into the future. The knee-jerk reaction of commentators to the high savings rate has puzzled me – it seems pretty straight forward – there is nothing magical or mysterious about it.

  3. James Crow March 13, 2012 at 10:43 am #

    The RBA have been putting on a brave face in not cutting interest rates further (if this tool is effective in the current monetary environment) however I can feel it in my bones that there is more downside than upside in the short to medium term. Let’s hope that the brave face doesn’t persist longer than required.

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