There’s a lot of talk at the moment about how the economy has slowed, but the economy’s underlying momentum is stronger than the bottom line growth figure suggests.
There’s no doubt that the economy’s growth rate as measured by the annual rise in gross domestic product, or the country’s production of goods and services, has slowed.
Economic growth is “below par”, as it’s become fashionable to say.
Unfortunately, the economy isn’t much like a game of golf, where “below par” is actually a good thing.
When economic growth is below normal, so is growth in employment.
That’s why the unemployment rate has been edging higher.
But it’s only been edging higher, not skyrocketing.
That’s because the gap between the current rate of growth and what’s needed to keep the jobless rate steady is not very large.
To understand the reason for that gap you need to look at the reasons for the slowdown.
It’s the result of a number of economic cross-currents.
Government spending, after allowing for inflation, will be lower in 2012/13 than the previous year, the first annual fall in the history of the national accounts which go back to 1959.
And it’s set to be repeated in the current year, 2013/14.
That will be a big drag on growth, because the public sector accounts for about a quarter of GDP.
Another drag on growth is private sector final demand – consumer spending, housing construction and business investment in productive capacity.
This component of spending expanded at a snail’s pace over the latest year, after surging in the preceding two years, the result of the peak in mining investment after an extraordinarily strong boom.
That’s another big drag on growth.
And what spending there’s been has been partly satisfied by businesses running down their inventories, or stocks of unsold merchandise, including coal and grain, after two years of big increases.
Spending that’s satisfied by inventory rundowns rather than production is yet another drag on growth.
But it’s not all bad news.
Exports have switched from very slow growth to rapid growth.
Imports have gone the other way, from strong growth to decline.
The upshot of all this is that final demand for Australia’s domestic product – including foreign demand for exports and demand satisfied by dipping into stocks, but not including our spending on imports – is actually growing quite strongly.
Like government spending, inventories can’t be cut year after year.
And when they return to normal, growing somewhere close to their long-run trends, the economy’s growth will once again reflect the growth rate of the quantity of Australia’s product that households, governments and business – both here and overseas – want to buy.
And that quantity – final demand for domestic product – grew by a decidedly above-par 3.4 per cent in the past year despite the drag from our home-grown version of budget austerity and the softness in private sector spending.
So, beneath the surface, the economy is stronger than it looks.
