It’s nice to be back in purple!
By the standards of the developed world, Australia’s economic performance over the past few years has been exceptional. It’s worth reminding ourselves that the unemployment rate in the United States and the United Kingdom – those two nations from which political conservatives, particularly, draw so much inspiration – is 7.8% in both cases. Across large parts of Europe, it is higher still. But in a country that seems to have largely forgotten that mass unemployment is possible, the government receives no credit for merely containing unemployment.
But why is there a perception round the traps that, more than just so-so, the economy is poor under the Gillard government?
Polls suggest the biggest issue of concern is that the cost of living is increasing. As Bernard Keane and others have pointed out, the public are out of step with the empirical evidence on that score. If you’re on Newstart, renting, and spending most of your outrageously meager income on food, rent, and utilities (the latter two have increased well beyond the general rate of inflation) you might have a point; for the majority of Australians it’s simply not supported by the evidence.
But there is another thing that might help to explain why, despite the steady if unspectacular GDP growth over the recent past, Australians might not be all that thrilled about the current economic conditions.
Real Net National Disposable Income, and Real GDP, per capita. Dec 2007 = 100
The graph above shows two time series from the Australian Bureau of Statistics – real (inflation-adjusted) GDP per capita, and Real Net National Disposable Income, which is a more accurate measure of the money available for Australians to spend. To simplify undersstanding, I have presented the data points relative to where they where in December 2007. As can be seen, both have grown over the life of the Rudd-Gillard government. In fact, disposable income has grown faster than GDP. But, since the last quarter of 2011, there’s been a divergence. Per-capita GDP continues to rise, but disposable income has actually fallen. Not a lot, and compared to 2007 we’re still very much in front of where we were but, nevertheless, it has declined recently.
To be clear, I don’t think the government should be blamed for month-to-month fluctuations in economic data. Nor is it the only factor. But, given the extraordinarily high expectations Australians now seem to have for the economy, perhaps it helps to explain part of the present dissatisfaction.
UPDATE: Handy to have a real economist around. Matt Cowgill has added a comment explaining an an alternative measure more accurately reflecting household incomes, and redone the graph. According to his calculations, incomes are still rising, but the rate of growth has tailed off quite considerably in the past year.
The other part of the equation is house prices. House prices hold such a prime position as a marker of the health of the economy for most people, rightly or wrongly. Falling or flat prices indicate to most that things are not well – especially in the key suburban seats.
We don’t have high expectations. We merely want a slightly less depression-like labour market. Since mid 2011, the Roy Morgan unemployment rate has risen 5 percentage points to 10.9%. The combined unemployment/underemployment rate has reach 19.8%.
I don’t know speaking as a renter myself, the prospect of a falling housing price fills me with unspeakable, furious hope and a not-even very guilty joy that this six-decade long transfer of wealth is finally tapering off.
Which is Robert’s point. We’ve nationally lost track of perspective, especially of wealth inequality.
Gavin,
I’m glad you posted those figures @2. I just wish the true unemployment rate was used not the one hour per fortnight which looks good but is totally dishonest.
“7.8% in both cases [UK & US]”
Do those countries count their unemployment using the same sleigh-of-hand method?
Modest claim, Robert. But justified.
I believe it is arguable that lack of understanding of the magnitude of the GFC and its aftermath is also an explanation for Australians’ discontents.
But what are the sources of this lack of understanding?
One possibility is denial — a wilful ignorance.
Another possibility is disinformation. Have Australians been denied access to good information, well presented, on this issue? I think that the Fed Gov has been weak and irresolute in presenting the case for Australian exceptionalism.
One of John Howard’s more memorable tactical political mis-steps was the time he told Australians they’d “never had it so good” in the mid-noughties; also, as now, during relatively benign economic conditions.
But these days it is a brave politician who refuses to flatter the poor-bugger-me mentality of the avaricious voter. There’s been a good fifteen years of pandering to this mentality, and voters have been indulged time and again to take the bait — it will take some unlearning before they will be receptive to fact-based information instead of emotional appeals.
Katz is right about what information needs to be presented — that’s the steak — but it will also take a leader who can bring the sizzle, before voters will be prepared to partake.
The world recession hasn’t effect much into Australia economy, despite it relates to the most central economy country. The Australia is a small populous state, but rich natural resources and the fundamental economy is strong, so Labor government claims they do the good management is not right, actually the treasure, Mr. Wayne Swan who shouldn’t have much knowledge or misleading public, so every time the Reserve Bank cut interest, that means economy slow down, but he said economic growth. Australia currency is higher than US dollar, that is not come from the outstanding talent Wayne Swan, or Julia Gillard, but US economy weakens. The economic growth is not real while the living cost hikes, housing being crisis. The climate concerns went wrong by carbon tax while the most releasing dioxide country as China, US, Russia ignore, so Australia reduces the dioxide doesn’t save our planet, but the company move their business to China, India and the other cheap laborer country to avoid the carbon tax, unfortunately the product offshore release dioxide as making in Australia, but the worker lose the job, climate changes for nothing.
The most Labor politician come from union leader as Craig Combet, Bill Shorten, Simon Crean…the Union leader have much expert about working class, but they have not experience about company management, so under the Labor government being deficit, they borrow and spent, and Union have more power, then Liberals returns, the national debt adding up, so the most Liberals government from State, federal often cut job when they just take government, that is the mess of Labor, but Union strike…Those problem occurred in Queensland, Mr. Campbell Newman cut the job and Union taken action. However the union ignore the cause of job cuts.
The ABS boasts that its definitions conform to ILO standards. Re “one hour per fortnight”, the ILO definitions include:
and “some” can apparently be as little as you like.
The ILO agrees that to be unemployed, one must have actively sought work very recently and must be ready to start very soon. In the EU, including the UK, one must have actively sought work within the last 4 weeks and must be ready to start within 2 weeks. Australia is only slightly tighter, in that one must be available for work in the reference week. In general, the ever-ready response to criticism of the tight definition of unemployment is that “everybody does it”.
I can only speak from experience of just having lived in th Netherlands for a few months: the same grocery shop there costs 50% what it costs here.
No, really: half.
yes we’re doing very well as an economy – and please let us never forget that – but spivs, supermarket duopolies and assorted ex-public corporations are all robbing us blind in the process and hoping we dont notice.
Robert,
You have a point – the rising terms of trade mean that national income and the volume of domestic output have diverged over the past decade. The falling terms of trade mean that national income falls even as the volume of output rises.
However, I think if your purpose is to measure the economic wellbeing of Australian households, then RNNDI isn’t quite ideal.
That’s because RNNDI is a) a measure of national income for the economy as a whole, not for households; and b) RGDI (from which RNNDI is derived), is deflated using a measure of the price level which is not the same as the prices that consumers pay for the goods and services they consume (which is measured by the CPI among other indices).
To get a welfare-relevant measure of the change in households’ economic wellbeing from the National Accounts, I’d rather do the following:
a) Go to the household income account (table 14)
b) Subtract the consumption of fixed capital from gross household income to yield net household disposable income;
c) Calculate net household disposable income per capita (divide net household disposable income by the ratio of GDP to GDP per capita);
d) Deflate net household disposable income per capita by some measure of the cost of the goods and services that households purchase. You could use CPI, or the personal consumption expenditure deflator. I’ve used CPI.
e) Convert real (cons. prices) net household disposable income per capita to an index, base it at the start of the mining boom, and compare its growth to chain-volume GDP per capita over the same period.
This is what I get when I do that calculation: https://www.evernote.com/shard/s39/sh/c7021d43-5f84-4584-869b-19c1dc340933/53adf9407e333ebadc761c5c53823649
In other words, yes, recent growth in real (cons. prices) per-capita household incomes has been softer than the real GDP/capita results would suggest, but this comes off the back of a decade of pretty strong gains. Also, the recent falls in real (cons. prices) household incomes is much less severe than the real (chain-vol) RNNDI figure in your post.
Yep, Lefty E. I spent a couple of weeks in Amsterdam last November. I felt like a millionaire. Everything was so cheap, in comparison. That’s never been my experience of Europe.
Housing costs are a bomb waiting to explode. You can pour a large percentage of your income into rents, with the knowledge that it means you’ll never be able to save enough for a house deposit.
But, what happens when you retire and you’ve only got a fixed income to pay the rent with. I’m really thankful I have an affordable mortgage to pay off. But, having that was all about luck.
Two comments on the other comments:
1) Of course we feel rich when we travel overseas. Our exchange rate is through the roof. The real test is whether people doing similar jobs in the two countries can purchase a similar value bundle of goods and services with their nominal income in their home country. On that measure, I don’t think we have a massive ‘cost of living’ problem. Prices have risen here, but so have incomes for most.
2) The unemployment thing drives me nuts. The ILO/ABS measure does what it says on the tin. The ABS is pretty upfront about what it means and what it doesn’t mean. If you want to include the underemployed as unemployed, then the labour force underutilisation rate is right there in the labour force statistics for you to use as you please. There’s no grand neoliberal conspiracy around the stats.
Thanks for the comments Matt, always nice to have professional expertise clarify things.
We also must mention your paper on labour vs. capital at some point.
Cheers Robert. Anyway, it was an interesting post. The effect of the terms of trade on national income has been an under-discussed issue in recent years, I think.
Matt Cowgill’s graph illustrates the effect of Rudd’s stimulus packages in 2009.
My partner and one of my students both recently visited Australia from Tokyo and were shocked at how expensive it was. My partner was staying with her parents in Adelaide and was shocked. My student traveled the east coast, but she was warned by her friends (in Canberra) that Australia was “about the same cost as Tokyo.” She told me she thought it worse. People returning from Oz to the rest of the world now speak of its cost in the same way that Australians used to talk about Europe or London.
As for the chart in the OP: I find it hard to believe that a few months’ downturn in the red line is driving the long-lasting negativity towards the government …
Yes, faustusnotes, your partner and the student were spending AUD that they bought at current exchange rates. Of course it seemed expensive! The exchange rate it nuts! That doesn’t means it’s expensive for those of us who work here and earn AUD.
Putting some numbers on Matt’s response to Faustus notes, a visitor from Japan today has to hand over 100 Yen to get one dollar. In June last year it was 75 Yen. That makes Australia one third more expensive – for them, but not for us.
Sam and Matt C, I’m not a complete idiot and I’m aware of the role of exchange rates. My partner went to Australia before the yen fell, and she is originally from Australia – we both know what Australia’s cost of living was before we went away (7 years ago now) and have visited intermittently in the interim, so we have seen prices going up by Australian standards. It’s like when you put on weight, and the person closest to you doesn’t notice but the people who see you once every six months are well aware of the new bulges.
Also, even if you discount the costs by a third, Australia is still expensive. Can you live alone (not sharing) in inner city Sydney or Melbourne for $600 a month, in a nice apartment? Because you can do that in Tokyo’s most desirable suburb. Can you get a three course lunch for $10? Because you can do that anywhere in Japan. Can you get a healthy fast food lunch for $5? It’s possible for a young single person to live alone in the centre of Tokyo, earning $10 an hour. Can you do that in Sydney, Melbourne or Brisbane?
People might like to have a look at the interactive chart of the Economist’s Big Mac index. Australia is +12.2, the Euro is +11.7, whereas Japan is -19.5. Hover the cursor over Australia and see where we’ve come from since the year 2000. Similarly, the Euro area was +50 back in 2008.
Off topic, but within the NAFTA free trade area Canada seems to be badly placed against the USA and Mexico. China on the other hand…
LE @ 9:
There’s a lot wrong with how Coles and Woolworths operate, but I don’t think you can say they are robbing us blind. They screw the suppliers but compete strongly with each other and with Aldi. In fact Woolworths say the Aldi is “shaping the market”. The impact is felt in the increasing emphasis on home brands, and we all need to be concerned about that.
Woolworths as a company last year made $1.816b net profit from revenues of $55.492b. That’s 3.2%. Wesfarmers came in at 3.6%. They are both more than supermarkets, especially Wesfarmers, but compare Telstra at 15.4% and BHP in a bad year at 21.2%. BTW the ACCC is having a look at the supermarket chains to see whether they are breaking the law, as against mere “combative capitalism”.
My dearly beloved manages our weekly shopping. We both contribute to “kitty”. I can’t remember the last time she jacked it up, but it must be 4-5 years ago. It’s the utilities and insurance that we feel the most. But then we don’t pay rent or school fees.
Further to @ 20, Wikipedia’s Big Mac article gives an eleven fastest earned list, with Tokyo 1st and Sydney 11th.
The way Coles and Woolworths operate reminds me very much of the Wallmart effect in the US. They do really push the prices down for suppliers, but their consumers do also really benefit from lower prices. People say they want one thing, but then vote a different way with their money.
IIRC contrary to popular belief spending on groceries is actually dropping as proportion of income.
The minimum wage in Australia is $16/hr so perhaps that explains some of the difference too?