The idea that the government and Reserve Bank have stimulated too much is ridiculous, based on a superficial analysis of Wednesday’s national accounts.
The fact is the economy is not all that strong apart from a temporary burst of spending that was funded almost entirely by government borrowing, and in any case was largely due to Victoria emerging from lockdown at the start of the quarter.
The economy is also being given the appearance of strength by a wild housing boom driven by the promise of super low interest rates for three more years.
It’s all a bit ironic because the government is now proudly spruiking what it previously denounced – borrowing and spending to support the economy – with Treasurer Josh Frydenberg quite enjoying his new role as boom-sayer.
He didn’t exactly use the word “boom” to describe the 3.1 per cent growth rate for the December quarter, but he did say it was “a very encouraging performance … given the economic abyss that we were staring into at the peak of this crisis”.
Which is true – it is encouraging, on the surface, but it also means the government and the Reserve Bank are now diametrically opposed in their view of the economy.
On Tuesday RBA governor Philip Lowe said unemployment would still be 6 per cent at the end of this year, and that they expect to hold interest rates where they are until “2024 at the earliest”.
On Wednesday, the Treasurer said the economy is strengthening, the recovery plan is working, the private sector is stepping up and the economy outperformed all other advanced economies in 2020.
They can’t both be right. Either the RBA will be forced to hike interest rates well before 2024 or Mr Frydenberg will be forced to man the stimulus pumps again to help the RBA.
At the heart of this conflict is wages: The RBA wants to get them up, the government does not, because the Coalition holds to the outdated belief that higher wages cost jobs, because profits and investment get squeezed.
Apart from the fact that the RBA now says that’s wrong, it is disproved by the national accounts: Company profits rose 15 per cent to a record high in 2020, but business investment is lagging and is the weakest part of the economy.
That was also reflected in the ASX reporting season: Three-quarters of the listed companies beat profit expectations and the focus was all about dividends.
Huge increases in payouts were announced, and companies that did it, rather than reinvesting in their businesses, were handsomely rewarded by franked-dividend hungry investors.
In other words, businesses are making plenty of money at the expense of wages, but they are not investing.
The December quarter GDP growth figure of 3.1 per cent was also much better than expected (economists had predicted 2.5 per cent).
There are two reasons for that, and why Australia’s economy is doing better than most other developed countries, if not all of them: First, the government and the Reserve Bank both adhered to Ken Henry’s GFC advice to “go hard, and go early”, and second, the states used the same slogan for lockdowns – hard and early.
Other countries were more tentative with stimulus and much less willing to lockdown hard, and the data clearly show an inverse correlation between deaths per million from COVID-19 and economic performance – the fewer deaths, the less recession.
There’s a third factor worth mentioning: The 4.3 per cent rise in consumer spending that underpinned the rise in GDP was driven by a 10.4 per cent rise in Victorian consumption as it exited the second lockdown. There was pent-up demand in Victoria, and it came off a low base.
But is 3.1 per cent growth on top of 3.4 per cent a boom? Superficially it looks that way, since it’s the first time we have ever had two consecutive quarters of 3 per cent + growth.
But that depends on how you look at it.
Measuring economic data in quarters is simply a convention based on convenience: Monthly would require too much effort and cost; six-monthly or yearly would leave policy makers in the dark for too long.
But in my view 2020 is best viewed as a year of two halves, not four quarters: First half, all recession; second half, all growth.
Also, gross domestic product (GDP) is irrelevant to everyone except economists and bureaucrats; far better to measure real disposable income per capita to get a sense of how the economy is affecting people.
In the first six months of 2020 real disposable income per capita was $29,893, 4.6 per cent less than for the second half of 2019.
In the second six months it was $30,924, 3.4 per cent more than in the first half year, and still 1.4 per cent down on the second half of 2019.
And as an aside that increase in the second half was almost entirely due to government payments – not wages growth.
There are still 1.2 million people on the dole (JobSeeker) and another 1.5 million were still supported by JobKeeper in December. Both of those supplements end this month.
Job advertisements increased 7.2 per cent in February to the highest level since 2018, and a lot of employers are complaining they can’t find staff, so the private sector job market does look encouraging.
So while the recovery is encouraging, it’s very much a work in progress.
Alan Kohler writes for The New Daily twice a week. He is editor in chief of Eureka Report and finance presenter on ABC News