Why GDP Growth Will Remain Constrained

What a difference a year makes!  Somewhat like the boiled frog syndrome, if you analyse economic data from month to month the changes seem relatively minor, but if you look back over a longer period you realise the cumulative effects are far more significant.

In September 2018, we wrote in our monthly report to clients a section entitled “Positive GDP Growth Masks Worrying Underlying Imbalances in the Australian Economy”.  The article reported Australia’s recently announced GDP growth rate had exceeded market expectations with an expansion of 3.4%.  However, our analysis showed “on closer inspection the figures appear to have been driven by strong household consumption, but this has come as a result of a reduction in household saving which at around 1% of income is much lower than historical averages”.  The conclusion of our article was “while the headline GDP number was a positive surprise, unfortunately a deeper analysis shows it is almost certainly unsustainable” and we included the graph below showing how the problem of consumption and income imbalances had persisted for many years.

If we now move forward a year to September 2019, we reported to clients last month “Australia’s Economy Slowed to a Decade Low” and that “the latest quarterly economic growth figure was the fourth consecutive sluggish quarterly GDP result, which was dragged down by weak spending in the household sector.” 

As we highlighted in our September 2018 article, the largest component of GDP growth is household consumption and in the long run this cannot exceed income as otherwise household debt increases and this cannot continue forever.  The major change between September 2018 and September 2019 was a fall in house prices which reduced households’ propensity to continue to spend in excess of their income due to the wealth effect of feeling poorer, but also households’ actual capacity to spend was reduced as the ability to fund an excessive lifestyle from realised profits on selling or re-financing their homes in a rising house price market had ended.

Since September 2018, household debt in Australia has continued to rise with debt to disposable income currently trending towards a ratio of 2.0 and the national household debt to GDP ratio remaining close to 120%, second only to Switzerland in the developed world.  More importantly, consumers are increasingly aware this trend cannot continue with household debt seen as the biggest problem for the nation from 55,000 respondents to a recent survey by the ABC with over half of millennials reporting that debt is a personal problem for them. 

Amicus’ conclusion is the problem of sustainable economic growth remains unsolved and the effects of high household debt levels are only likely to become more severe over time until they are addressed. Continually reducing the cash rate to lower the interest burden is not a long term solution and may not even be a short term one given the recent reaction of consumers to the three interest rate cuts over the last year.

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