The Australian economy is behaving strangely

By MILLIE MUROI, Economics Writer

Australian consumers are usually the engine room of the economy. Every extra dollar we spend drives economic growth higher – and there’s so many of us that we’re usually a force to be reckoned with. In the three months to September, though, something strange happened.

We had more income to splurge but shied away from spending much of the extra cash according to national accounts data from our number-crunchers at the Australian Bureau of Statistics this week. Instead, a bigger share of our pay made its way into piggy banks, mattresses and bank vaults.

Households, while still accounting for nearly half the economy, took a back seat. So, how did the Australian economy still manage to step up?

The size of our economy can be measured in three ways: output (the amount of goods and services we pump out), income (the amount of profit pocketed by businesses and pay that has flowed into households) or by looking at all the spending that happens.

That last one includes money spent by the government, businesses, foreigners (buying up our exports) and our heavy lifters: households. Since the mid-2000s, household consumption has accounted for at least half the size of our economy. It’s only this September quarter that household spending dropped to less than half of gross domestic product (GDP).

Does that mean households are struggling? Well, it depends on how you look at it.

If people’s shopping receipts are any indication of their living standards, you could argue things are looking pretty stagnant. Household spending came in flat at 0 per cent growth.

And, in fact, if we look at spending per household, we’re grinding backwards. Why? Because our population has been boosted by migration. While overall household spending has stayed flat in the September quarter, we’re individually spending less than we were earlier in the year. And that’s after we saw total household spending growth turn negative the previous quarter.

Growth for the wider economy has also been slipping into reverse when we account for population growth. Looking at economic growth per person, we’ve been sliding backwards for nearly two years.

Back to households, though. It’s not all bad news. We actually spent a touch more on discretionary goods and services – things we may not need but are nice to have, such as new clothing and recreation. Spending on essentials, meanwhile, fell. We spent more on things such as rent and staying healthy, but dished out far less on electricity and gas thanks to a warmer-than-expected winter, and partly thanks to the government’s energy bill relief that took the heat out of our energy bills.

Household disposable income – the amount we have left over to spend or save after paying our taxes – also grew. Not only did our income (at least collectively) grow by 1.3 per cent, mainly thanks to pay rises, many of us also had our taxes slashed, too. Stage 3 tax cuts came into play in July, pushing down the income tax we paid during the quarter by 3.8 per cent. Those who had money stashed in the bank also got a boost from interest rates on deposits.

But we didn’t do what a lot of economists (and the Reserve Bank) expected us to do – or at least not to the degree they thought we would. Instead of going on a spending spree with our extra cash, we squirrelled a lot of it away. It’s common for people, especially when they’re worried about their finances, to take a while to work out how they are going to spend their extra money.

The household ratio of saving to income – which tells us how much of our disposable income we stowed away for a rainy day – grew from 2.4 per cent last quarter to 3.2 per cent. Since our incomes grew, but we weren’t spending any more than we were in the June quarter, the slice of our pay going towards savings increased.

The saving-to-income ratio is still much lower than the 10 to 20 per cent we were at during the pandemic when the rivers of stimulus payments gushed in, and our spending options were locked down, but it has been climbing back from a low of 1.5 per cent in March last year.

Of course, the money we save ends up sitting idle – at least while it stays in our coffers. We don’t spend it, so it doesn’t flow back into businesses, and doesn’t stimulate the economy to grow.

But our decision to save a lot of the money we got to keep thanks to tax cuts doesn’t explain the slow – but positive – upward crawl of the economy. If households didn’t spend any more than they did in the previous three months, then how did the economy still manage to expand?

A big driver of our economic growth was spending – not by households or businesses – but by the government. It contributed 0.6 percentage points to growth in the three months to September. Part of this was thanks to a pick-up in public investment by state and local governments on infrastructure projects such as roads and renewable projects.

But a big chunk of the government spending was on cost-of-living relief, such as the energy rebates, which basically just shifted what would have been paid by consumers to cook and heat their homes, to the government’s shopping list. It meant overall government spending hit a near-record-high share of the economy at more than 28 per cent.

Since overall economic growth only came in at 0.3 per cent (notably lower than the 0.5 per cent economists had been expecting), government spending made the difference between our economy shrinking and treading water.

There were also other factors with a smaller impact on growth, including a slight uptick in the construction of new homes, which pushed up private investment spending. There was also a fall in inventories (generally stock held by companies) and net overseas trade – as imports fell and exports grew – which contributed 0.1 percentage points to GDP.

Although the economy’s usual star player – households – spent less than expected in the September quarter, there are signs things will pick up in the final three months of the year. For one thing, retail trade picked up 0.6 per cent in October, even before all the major discounts started kicking in last month, coaxing customers (and their wallets) out for Black Friday and Cyber Monday.

So, how does this position the Reserve Bank?

While economic growth and household spending growth are running below its forecasts, the bank has previously said the level of demand – how much we’re spending now as opposed to how fast our spending appetites are growing – is still too high unless we improve how much (or how efficiently) we can produce things.

It’ll take more weakness in spending, or more progress on slamming a lid on inflation, for the Reserve Bank to start cutting rates. So far, Australian households – and their spending – seem stuck in the holding pen.

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How we measure recessions is wrong. There's a better way to do it

By MILLIE MUROI, Economics Writer

Of all the scary words in economics, recession is probably among the worst. Not just because of the bad times we link it with, but because of the way it’s measured.

What if I told you the way we measure recession is wrong? Or at least that we need to give it a rethink?

The widely used rule for a recession is “two consecutive quarters of negative economic growth”. That means two sets of back-to-back periods (of three months each) where gross domestic product – or GDP: the amount of goods and services that we’re producing and selling – shrinks.

Under that definition, Australia has been in a recession only once since 1991, and that was shortly after the pandemic and its lockdowns hit.

The idea is this: if we’re making and buying less, that must mean we’re having a hard time. And if it happens for six months, that must mean we’re becoming really worse off!

Here’s the thing, though. GDP is already a flawed measure at the best of times. Sure, it can give us an indication of how much we’re pumping out on the assembly line or purchasing at the checkout. But that doesn’t tell us anything about other measures of our wellbeing: environmental damage, our health or education outcomes.

It also doesn’t tell us how growth is shared: an expanding economy doesn’t mean everyone is getting better off. All or most of it could just be flowing to the already well-off.

Right now, as much as a lot of us feel worse off, we’re technically not in a recession. Looking purely at GDP, the Australian economy has managed to tread water.

In the September quarter (and the one before that, and the one before that), GDP grew by a tiny 0.2 per cent – but it was still above zero: close to a recession, but no cigar.

It helps if we split that figure up by population. When we consider the boom in our population over the past couple of years, we have, indeed, gone backwards. For the past year and a half, GDP growth per person has consistently fallen every quarter.

But to better measure and identify recessions, which we tend to see as a signal for economic pain, we should look to the labour market.

Why? Because that’s where most of the impact of a recession is felt: think about job losses and how hard it is to find a job when the economy is tanking, as well as the impact our jobs have on our lives.

Over the past year, our biggest banks have said our strong labour market has helped people muddle through the cost-of-living crisis. We can change our spending habits to keep up with mortgage repayments or work extra hours to keep up with our rent. It’s not fun, but it’s possible.

Lose your job, though, and life is much harder. It can put people under serious financial stress and damage their mental health.

Enter American economist Dr Claudia Sahm. The tool she developed – called the “Sahm rule” – helps to warn when an economy is entering a recession. It has missed the mark only twice in the past 11 US recessions.

The Sahm formula looks at monthly unemployment data to track how quickly the national unemployment rate has risen compared to the past year. Specifically, it compares the current three-month moving average of the national unemployment rate with the lowest value it has hit in the previous 12 months.

If the current rate is at least 0.5 percentage points higher than the lowest point in the previous year, it means we’re in the early stages of a recession. Measures such as the Sahm rule help us identify weaknesses in our economy and the risk of a recession early. That’s because jobs data is more frequently reported than GDP.

Sahm says changes in the labour market are crucial in understanding the state of the economy.

“If you were put on a desert island and could only have one variable to say what’s going on in the US economy, unemployment is the one you want,” she says. “It really says a lot about whether we’re in good times or bad.”

Sahm’s formula came about in 2019 while she was searching for a better way to fight the next recession. “I had just watched for a decade how hard the Great Recession was on families,” she says. “The goal was to have something people could understand that was very simple, easy to track and really accurate. Your best shot at fighting a recession is to move quickly.”

According to Sahm’s rule, Australia has been in the early stages of a recession for at least one month this year (although the Reserve Bank has argued the Sahm rule should be triggered at 0.75 per cent rather than 0.5 per cent).

When developing the rule, Sahm says she knew from the beginning that examining unemployment would be key. “I already knew, just from my work experience, even small increases in the unemployment rate are a bad sign,” she says.

Australia’s labour market has been remarkably resilient, with the most recent unemployment rate in September coming in at a historically low 4.1 per cent. But we’ve been in – or close to – the danger zone for the past few months.

Why does this matter? Getting on the front foot is important, especially for policymakers such as the government and central banks, to limit the fallout from an economic slowdown.

Independent economist Saul Eslake has long believed the common definition of a recession is flawed. He points to the two consecutive quarters of negative GDP growth in Australia in 1977: “Nobody thinks that was a recession,” he says.

On the other hand, Australia didn’t see two consecutive quarters of negative GDP growth during either the global financial crisis or the tech wreck in the early 2000s. But Eslake says Australia arguably faced minor recessions during both those periods.

His own metric for a recession, like Sahm’s, focuses on the labour market. He says a recession should be when unemployment rises by more than 1.5 percentage points in 12 months.

“The biggest impact of a recession is on those who lose their jobs or take a long time to find them,” he says.

“There’s evidence that people who lose their jobs during a recession, or enter the workforce as school-leavers or university graduates during a recession, take longer than normal to find a job.”

This then has a “scarring” effect. Those who lose their jobs or have difficulty finding one tend to end up earning less over the rest of their working lives.

The better we are at identifying a recession, the better we can be at protecting jobs and longer-term livelihoods.

Of course, it may not be as simple as just monitoring the jobs market. In the US, for example, the National Bureau of Economic Research (NBER) considers a range of measures beyond GDP – including personal income, employment, wholesale and retail sales – when deciding whether to declare a US recession.

And even Sahm says her rule has limitations, especially as we’ve seen big changes in the supply of labour across many countries.

“This particular economic cycle has challenged simplicity in a way that means these simple rules need some kind of extra check,” she says.

But whether we go with a measure that is simpler than the NBER gauge, more complex than the Sahm rule, or timelier than GDP, it’s clear the focus needs to be more on jobs.

If there’s one job our economic leaders have, it’s to keep us, as much as possible, in ours.

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Our economy has turned into a tortoise. The RBA will be pleased

By Millie Muroi, Economics Writer

Most of us know the age-old saying: slow and steady wins the race. Numbers released into the wild on Wednesday show the Australian economy is definitely a tortoise – but it should make the Reserve Bank pretty happy.

The national accounts – data gathered and shared every three months by the Australian Bureau of Statistics – gives us one of the most detailed pictures of how our economy has been tracking. The numbers always run slightly behind where we are because all the information has to be collected, crunched and spat out into a digestible clump. This week’s data drop was for the three months to June.

So, how did we go? There’s not much that should come as a surprise. Economists have long known the economy has been slowing. And most of the household data points to trends you’ve probably seen and lived yourself less spending, less disposable income and less of our income being put away for a rainy day.

Economic growth – or gross domestic product (GDP) – was weak, expanding 0.2 per cent in the June quarter for the third quarter in a row. But economic growth per person, which matters more when assessing our living standards, has tumbled … again. It fell 0.4 per cent – the sixth back-to-back quarter of shrinkage.

Will this worry our decision makers? Probably not. The focus is almost always on the total, not what’s happening on an individual level. It’s also much simpler to talk about GDP than GDP per capita – and much easier to fit in a headline!

The Reserve Bank, for one, won’t be worried by Wednesday’s figures. In fact, it’s probably quite happy. Why? Because its decisions are made at an aggregate level: it looks at the big picture, not the finer details.

There’s always a risk the bank will push the economy too far down the drain.

The bank’s forecasts for certain sections of the national accounts might have fallen on the wrong side of the fence: disposable income (how much people have to spend or save after taxes) for example, came in 0.3 per cent lower over the year, compared with the bank’s expectations for a 1.1 per cent increase.

But the Reserve Bank has one thing at the front of its mind: pushing inflation back into the 2 per cent to 3 per cent target range. In June, annual inflation was still sailing in at 3.8 per cent.

Sure, the bank also wants to keep Australians employed. But with the number of jobs still growing, and the unemployment rate (at least the headline measure) staying low by historical standards, it’s inflation that the bank is worried about.

As you know, inflation is determined by the balance – or imbalance – between demand and supply. There’s not much the Reserve Bank can do about supply (except shout from the sidelines about the importance of boosting productivity), so its focus is on demand.

From the bank’s perspective, it doesn’t matter where that demand comes from, or who exactly is doing the demanding. Its mission is to dampen demand when inflation is high, and give it a boost when inflation is low and the economy is slow.

There’s always a risk the bank will push the economy too far down the drain. We know GDP is only just managing to keep pace and the Reserve Bank has one tool – interest rates – which it’s not afraid of holding high until there’s a clearer sign it has inflation under its thumb.

After all, it doesn’t want inflation running high and finishing first, unless finishing means an end to high inflation.

For this to happen, the bank needs demand to slow down. That means less spending – at least until we figure out a way to pump out more goods and services with the limited people, machinery and materials we have.

It’s clear households are feeling more pressure. The proportion of households’ income that they were able to save dropped to 0.6 per cent in the June quarter, compared with 1.7 per cent at the same time last year. That’s despite households also cutting their spending.

Household consumption, at more than half of GDP, is the single biggest driver of economic growth. But with household spending down, it was government spending (which contributed 0.3 percentage points to growth) that helped keep the economy expanding. Investment spending on new homes, business equipment and building had no impact this time around, while net trade (the difference between exports and imports) contributed 0.2 percentage points, largely thanks to international students and all the spending they did in our economy.

Overall, there’s little in the national accounts to spook the Reserve Bank. Treasurer Jim Chalmers copped some heat this week for a tweak in his language when he said interest rates were “smashing” the economy. But Chalmers and the bank know that without a miracle or a slowing economy, it’s hard to see inflation being reined in anytime soon.

If anything, the national accounts show the economy is moving the way the bank wants. That means both an interest rate cut and rise are unlikely for the time being. The Reserve Bank doesn’t want the economy to stall, but it needs any increase in demand to run behind growth in supply, for inflation to come down.

Right now, our country is still running too hard down the shopping aisle for suppliers to keep up, meaning we’re putting upwards pressure on prices. That’s where the government needs to strike a fine balance. Spend too little and, as our figures showed, we could slip into recession. But spend too much and inflation could stick around for longer.

Anyone who runs knows it’s impossible to sprint all the time. Going slow is not always fun, but until we build up the stamina, muscle and skill, we have to make sure not to push ourselves too hard for too long in case we sustain an injury.

It’s a similar story for the economy. The demands we put on it have to grow alongside our ability to cater for them. The Reserve Bank is like a coach making tough calls because it thinks we’re pushing too hard.

Our economy is slowing, and it’s a fine balance to strike when jobs are on the line. But as long as we’re not running backwards, and with the jobs market so strong, the bank will be happy to stay the course with our tortoise economy.

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GDP is going backwards. That doesn't mean your life is, too

By Millie Muroi, Economics Writer 

If gross domestic product – better known by its nickname GDP – were a perfect reflection of our quality of life, we would be in trouble.

It’s a rough measure of how much we produce, earn and spend, and it grew a measly 0.1 per cent in the first three months of this year. If our population hadn’t boomed at the same time, Australia would be in recession. In fact, in per-person terms, we’ve actually been going backwards for an entire year.

GDP is a go-to gauge for politicians, pundits and journalists when it comes to our standard of living. Generally, if it’s growing, that’s a good thing. It means we’re producing more, making more money and getting to consume more: all signs of a happy, healthy economy, right? Not necessarily.

GDP reflects the monetary gains from economic activity. But it’s basically blind to any destruction we might cause to the natural environment as we pursue profits and make purchases. And it tells us nothing about how those monetary gains – or income – are shared among the rich and poor.

It also fails to account for all the other things that make life worth living: safety, a sense of belonging and how healthy (not just wealthy) we are, to name a few.

While it’s important to keep an eye on traditional economic indicators, they don’t give us a well-rounded picture of many of the things that matter. Metrics such as GDP, unemployment and inflation can help the Reserve Bank and government make informed choices when steering the economy.

But relying on these indicators alone is like driving down a highway with broken mirrors and shattered headlights. You might be able to see some things, but you’ll miss (and hit) a lot – with some pretty big consequences.

It’s part of the reason the Labor government has been copping heat this week after it decided not to add questions on topics such as sexuality in the 2026 census. Deputy Prime Minister Richard Marles said it was to avoid “divisive” community debate, but many members of the LGBTQ community understandably felt they were being overlooked.

Without solid data, it’s difficult to make policy decisions, particularly for groups that are vulnerable and facing particular challenges. This was a chance to fill one of those gaps.

But the Coalition has no clean record either when it comes to data collection. Shadow Treasurer Angus Taylor has said the government needs to zone in on lower inflation and lower interest rates. Fine. Except that he wants to scrap the government’s “Measuring What Matters” framework to do so.

But the Measuring What Matters framework … matters. It tracks our progress towards a more healthy, secure, sustainable, cohesive and prosperous Australia. That may sound fluffy and abstract. But those five adjectives frame 50 key indicators that make up the wellbeing dashboard, covering everything from air quality to how secure we feel and how healthy we are. It’s a toolkit we can use to fix at least some of the broken mirrors and headlights on our car and develop a more holistic view of our economy.

While it’s important to keep an eye on traditional economic indicators, they don’t give us a well-rounded picture of many of the things that matter.

It’s all about getting the economy to work for people and the planet rather than the other way around.

Dr Cressida Gaukroger, wellbeing government initiative lead at the Centre for Policy Development, says the data doesn’t often swing massively (perhaps one reason why the wellbeing report was largely glossed over by the media last week).

But it’s important because it gets us thinking about the long term, specifically “the changes we should be making now and the investments that we should be making now,” Gaukroger says. This way, we can save ourselves from longer-term problems that might otherwise be ignored in the frenzy around the latest GDP number, for example.

“Without that kind of long-term vision of what we should be aiming for, it makes it very difficult when we’re stuck with short-term election cycles and politicisation of government spending,” Gaukroger says.

So, what did the latest update on this data tell us? Let’s look at the bad news first.

Female health-adjusted life expectancy has dropped. Normally, Gaukroger says, we don’t see much movement in the average number of years a person can expect to live in “full health”. But chronic health conditions are crippling more people. About half of Australians lived with a chronic health condition in 2022 – up from 47 per cent in 2018 and 42 per cent in 2002, with women more likely to be grappling with one.

When it came to the environment, biological diversity worsened. From 1985 to 2020, the abundance of threatened and near-threatened species plummeted by roughly 60 per cent. Biodiversity is important because it ensures balanced and functioning ecosystems.

Some measures of cohesiveness have also deteriorated. In 2023, our sense of belonging fell to a value of 78 – the lowest it has been since 2007, when the measure was benchmarked at a score of 100.

But it’s not all doom and gloom. Other measures have improved, highlighting the areas we are thriving in.

We’re feeling safer walking through our neighbourhoods at night, and more than three-quarters of people in 2023 agreed with the statement that “accepting immigrants from many different countries makes Australia stronger” – up from 63 per cent in 2018.

Gaukroger says another positive development is the decline in “material footprint” per person, meaning fewer raw materials such as fossil fuels and minerals are being extracted to satisfy our demand. While the amount of raw materials being used to fulfil our wants and needs was 37.6 tonnes a person in 2010, the amount fell to 31 tonnes in 2023.

That means we’re working towards a circular economy, which reduces waste by, for example, sharing, reusing, repairing, and recycling things and designing materials that are less resource-intensive to make in the first place. This is a win for the environment.

The Measuring What Matters dashboard is not perfect. As Treasurer Jim Chalmers admitted last week, some of the data is too old, and there are still holes that need to be patched up. But it’s still well worth the investment.

Focusing too heavily on one thing comes at a cost. If we want a well-rounded gauge of our wellbeing and effective policy to drive us to our desired destination, we need to look beyond GDP.

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The RBA has squeezed us like a lemon, but it's still not happy

Let me be the last to tell you the economy has almost ground to a halt and is teetering on the edge of recession. This has happened by design, not accident. But it doesn’t seem to be working properly. So, what happens now? Until we think of something better, more of the same.

Since May 2022, the Reserve Bank has been hard at work “squeezing inflation out of the system”. By increasing the official interest rate 4.25 percentage points in just 18 months, it has produced the sharpest tightening of the interest-rate screws on households with mortgages in at least 30 years.

To be fair, the Reserve’s had a lot of help with the squeezing. The nation’s landlords have used the shortage of rental accommodation to whack up rents.

And the federal government’s played its part. An unannounced decision by the Morrison government not to continue the low- and middle-income tax offset had the effect of increasing many people’s income tax by up to $1500 a year in about July last year. Bracket creep, as well, has been taking a bigger bite out of people’s pay rises.

With this week’s release of the latest “national accounts”, we learnt just how effective the squeeze on households’ budgets has been. The growth in the economy – real gross domestic product – slowed to a microscopic 0.1 per cent in the three months to the end of March, and just 1.1 per cent over the year to March. That compares with growth in a normal year of 2.4 per cent.

This weak growth has occurred at a time when the population has been growing strongly, by 0.5 per cent during the quarter and 2.5 per cent over the year. So, real GDP per person actually fell by 0.4 per cent during the quarter and by 1.3 per cent during the year.

As the Commonwealth Bank’s Gareth Aird puts it, the nation’s economic pie is still expanding modestly, but the average size of the slice of pie that each Australian has received over the past five quarters has progressively shrunk.

But if we return to looking at the whole pie – real GDP – the quarterly changes over the past five quarters show a clear picture of an economy slowing almost to a stop: 0.6 per cent, 0.4 per cent, 0.2 per cent, 0.3 per cent and now 0.1 per cent.

It’s not hard to determine what part of GDP has done the most to cause that slowdown. One component accounts for more than half of total GDP – household consumption spending. Here’s how it’s grown over the past six quarters: 0.8 per cent, 0.2 per cent, 0.5 per cent, 0.0 per cent, 0.3 per cent and 0.4 per cent.

A further sign of how tough households are doing: the part of their disposable income they’ve been able to save each quarter has fallen from 10.8 per cent to 0.9 per cent over the past two years.

So, if the object of the squeeze has been to leave households with a lot less disposable income to spend on other things, it’s been a great success.

The point is, when our demand for goods and services grows faster than the economy’s ability to supply them, businesses take the opportunity to increase their prices – something we hate.

But if we want the authorities to stop prices rising so quickly, they have only one crude way to do so: by raising mortgage interest rates and income tax to limit our ability to keep spending so strongly.

When the demand for their products is much weaker, businesses won’t be game to raise their prices much.

So, is it working? Yes, it is. Over the year to December 2022, consumer prices rose by 7.8 per cent. Since then, however, the rate of inflation has fallen to 3.6 per cent over the year to March.

Now, you may think that 3.6 per cent isn’t all that far above the Reserve’s inflation target of 2 per cent to 3 per cent, so we surely must be close to the point where, with households flat on the floor with their arms twisted up their back, the Reserve is preparing to ease the pain.

But apparently not. It seems to be worried inflation’s got stuck at 3.6 per cent and may not fall much further. In her appearance before a Senate committee this week, Reserve governor Michele Bullock said nothing to encourage the idea that a cut in interest rates was imminent. She even said she’d be willing to raise rates if needed to keep inflation slowing.

It’s suggested the Reserve is worried that we have what economists call a “positive output gap”. That is, the economy’s still supplying more goods and services than it’s capable of continuing to supply, creating a risk that inflation will stay above the target range or even start going back up.

With demand so weak, and so many people writhing in pain, I find this hard to believe. I think it’s just a fancy way of saying the Reserve is worried that employment is still growing and unemployment has risen only a little. Maybe it needs to see more blood on the street before it will believe we’re getting inflation back under control.

If so, we’re running a bigger risk of recession than the Reserve cares to admit. And if interest rates stay high for much longer, I doubt next month’s tax cuts will be sufficient to save us.

Another possibility is that what’s stopping inflation’s return to the target is not continuing strong demand, but problems on the supply side of the economy – problems we’ve neglected to identify, and problems that high interest rates can do nothing to correct.

Problems such as higher world petrol prices and higher insurance premiums caused by increased extreme weather events.

I’d like to see Bullock put up a big sign in the Reserve’s office: “If it’s not coming from demand, interest rates won’t fix it.”

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The economy is just the means to an end. So, is it working?

We spend a lot of time hearing, reading and arguing about The Economy, and we’ll be doing a lot more of all that after we’ve seen Tuesday night’s federal budget.

But while we’re waiting, let’s take a moment to make sure we know what we’re talking about. What’s the economy for? How does it work? What does it do? Who owns it? Who runs it?

Why am I suddenly so deep and meaningful? Because Dr Shane Oliver, AMP’s chief economist, has written a note saying the economy doesn’t seem to be giving us what we want.

As individuals, it’s easy to think of the economy as something that’s outside ourselves, something that does things to us, over which we have little control.

As individuals, that’s true. But if you take us altogether, it’s not true. Why not? Because if you took all the people out of the economy, there wouldn’t be an economy. What’s more, you wouldn’t need one.

You’d be left with a lot of homes and other buildings, roads, cars and machines that had been abandoned, were just sitting there and so were worthless.

So, in that sense, the economy belongs to all of us because it is us. It’s most of us getting up each morning, going to work and earning a living, and all of us spending what’s been earnt.

Most of us have paid work, some of us do unpaid work, while some of us are still getting an education and others are too old or sick to work. But all of us consume.

So don’t think of the economy as high finance beyond your understanding. It’s actually as basic as you can get. This is why it’s important to remember the economy is just a means to an end.

At its most elemental, the end we’re seeking is for the economy to provide us with food, clothing and shelter, plus a few luxuries. But all of us want to do more than barely subsist. We want our lives to bring us enjoyment.

Economists say we want all our earning and spending to bring us “utility”. A better word would be satisfaction. But it’s no stretch to say what we want from our lives is happiness. And it’s on happiness that Oliver finds we aren’t doing as well as we should be.

All this is why the best way to think about the economy is that it belongs to all of us. Legally, however, most of the capital – whether physical or financial – is owned by companies, big and small. So most of us are employed by companies.

Where does government fit in? Apart from employing a lot of workers, it owns most of the roads and other public infrastructure. It makes the laws that limit what businesses (and the rest of us) are permitted to do and the way we do it.

Governments discourage some business activities and – as we’ve seen with the Albanese government’s recent announcements – seek to encourage others.

But the central bank also uses its control over short-term interest rates to “manage” the strength of the private sector’s total demand for goods and services, encouraging it when unemployment is high, and – as now – discouraging it when inflation is high.

As well, the federal government uses its budget – government spending on one side, taxes on the other – to discourage or encourage private demand. Hence, all the fuss next week.

But how are we, and other rich countries, going in our efforts to use our economic activity – earning and spending – to keep us happy and getting happier? Not well, according to Oliver’s research.

For Australia, he finds that, though our real annual gross domestic product per person has increased fairly steadily over the past 20 years, the average score we give ourselves on our satisfaction with our lives (as surveyed by the World Happiness Report) has actually been falling over the same period.

It’s a similar story for the United States, where its real GDP per person has risen steadily since 1946, while the proportion of Americans describing themselves as “very happy” has fallen slowly over most of that period.

In particular, he finds that younger people in the US, Canada, Australia and New Zealand are the least happy age group. This is a major change from 20 years ago.

Why is this happening? We can all have our own theories, but I think the big mistake many of us – and certainly, most economists – make is to focus on improving our material standard of living: using our increasing income to buy bigger and better things. Homes, cars, smartphones, whatever.

Trouble is, our materialism puts us on a “hedonic treadmill”. We think buying a bit more stuff will make us happier and, at first, it does. But pretty soon the thrill wears off – we get used to our higher standard of living – and tell ourselves it’s actually the next new thing that will make us happy.

Many people use their pursuit of promotions and higher income to make them happier by raising their social status. But this, too, is a step up you can get used to. And, in any case, it’s a zero-sum game. If passing you on the status ladder makes me happier, why won’t being passed by me make you less happy?

Actually, as I explained in a book I wrote some years back, there’s a lot of evidence that what’s better at giving us lasting satisfaction is the quality of our relationships with partners, family and friends. Beats just buying more stuff or getting a promotion.

And while it’s true that the economy, and our small role in it, can be seen as just a means to an end, it turns out that “extrinsic” benefits – such as wanting to earn money because of the nice things it buys – aren’t as satisfying as “intrinsic” benefits: such as finding a job you enjoy doing, not just do for the money it brings.

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RBA will decide how long the economy's slump lasts

The media are always setting “tests” that the government – or the opposition – must pass to stay on top of its game. But this year, it’s the Reserve Bank facing a big test: will it crash the economy in its efforts to get inflation down?

There’s a trick, however: when the Reserve stuffs up, it doesn’t pay the price, the elected government does. This asymmetry is the downside of the modern fashion of allowing central banks to be independent of the elected government. Everything’s fine until the econocrats get it badly wrong.

It’s clear from last week’s national accounts that the economy has slowed to stalling speed. It could easily slip into recession – especially as defined by the lightweight two-successive-quarters-of-negative-growth brigade – or, more likely, just go for a period in which the population keeps growing but the economy, the real gross domestic product, doesn’t, and causes unemployment to keep rising.

Because interest rates affect the economy with a lag, the trick to successful central banking is to get your timing right. If you don’t take your foot off the brake until you see a sign saying “inflation: 2.5 per cent”, you’re bound to run off the road.

So now’s the time to think hard about lifting your foot and, to mix the metaphor, ensuring the landing is soft rather than hard.

Here’s a tip for Reserve Bank governor Michele Bullock. If you get it wrong and cause the Albanese government to be tossed out in a year or so’s time, two adverse consequences for the Reserve would follow.

First, it would be decades before the Labor Party ever trusted the Reserve again. Second, the incoming Dutton government wouldn’t feel a shred of secret gratitude to the Reserve for helping it to an undeserved win. Rather, it would think: we must make sure those bastards in Martin Place aren’t able to trip us up like they did Labor.

Last week’s national accounts told us just what we should have expected. They showed that real GDP – the nation’s total production of goods and services – grew by a negligible 0.2 per cent over the three months to the end of December.

This meant the economy grew by 1.5 per cent over the course of 2023. If that looks sort of OK, it isn’t. Get this: over the past five quarters, the percentage rate of growth has been 0.8, 0.6, 0.5, 0.3 and 0.2. How’s that for a predictable result?

Now you know why, just before the figures were released, Treasurer Jim Chalmers warned that we could see a small negative. It’s a warning we can expect to hear again this year.

If you ignore the short-lived, lockdown-caused recession of 2020, 1.5 per cent is the weakest growth in 23 years.

But it’s actually worse than it looks. What measly growth we did get was more than accounted for by the rapid, post-COVID growth in our population. GDP per person fell in all four quarters of last year.

So whereas real GDP grew by 1.5 per cent, GDP per person fell by 1 per cent. We’ve been in a “per-person recession” for a year.

It’s not hard to see where the weaker growth in overall GDP is coming from. Consumer spending makes up more than half of GDP, and it grew by a mere 0.1 per cent in both the December quarter and the year.

At a time when immigration is surging, and it’s almost impossible to find rental accommodation, spending on the building of new homes fell by more than 3 per cent over the year.

Of course, this slowdown is happening not by accident, but by design. Demand for goods and services had been growing faster than the economy’s ability to supply them, permitting businesses of all kinds to whack up their prices and leaving us with a high rate of inflation.

Economists – super-smart though they consider themselves to be – have been able to think of no better way to stop businesses exploiting this opportunity to profit at the expense of their customers than to knock Australia’s households on the head, so they can no longer spend as much.

For the past several decades, we’ve done this mainly by putting up interest rates, so people with mortgages were so tightly pressed they had no choice but to cut their spending. The Reserve began doing this during the election campaign in May 2022, and did it again 12 more times, with the last increase as recently as last November.

It would be wrong, however, to give the Reserve all the credit – or the blame – for the 12 months of slowdown we’ve seen. It’s had help from many quarters. First is the remarkable rise in rents, the chief cause of which is an acute shortage of rental accommodation, affecting roughly a third of households.

Next are the nation’s businesses which, in their zeal to limit inflation, have raised their wages by about 4.5 percentage points less than they’ve raised their prices. Talk about sacrifice.

And finally, there’s the federal government, which has done its bit by restraining its spending and allowing bracket creep to claw back a fair bit of the inflation-caused growth in wage rates. As a consequence, the budget has swung from deficit to surplus, thereby helping to restrain aggregate demand.

It’s the help the Reserve has had from so many sources that risks causing it to underestimate the vigour with which spending is now being restrained. It’s far from the only boy standing on the burning deck.

Last week some were criticising the Reserve for popping up in November, after doing nothing for five months, and giving the interest-rate screws another turn while, as we now know, the economy was still roaring along at the rate of 0.2 per cent a quarter.

The critics are forgetting the politics of economics. That isolated tightening was probably the new governor signalling to the world that she was no pushover when it came to the Reserve’s sacred duty to protect us from inflation.

In any case, a rate rise of a mere 0.25 per cent isn’t much in the scheme of things. It’s possible that quite a few hard-pressed home buyers felt the extra pain. But when did anyone ever worry about them and their pain? It was the central bankers’ duty to sacrifice them to the economy’s greater good – namely, preventing the nation’s profit-happy chief executives from doing what comes naturally to all good oligopolists.

The looming stage 3 tax cuts should give a great boost to the economy, of course, provided seriously rattled families don’t choose to save rather than spend them.

What matters most, however, is by how much unemployment and underemployment rise before the economy resumes firing on all cylinders. So far, the rate of unemployment has risen to 4.1 per cent from its low of 3.5 per cent in February last year.

By recent standards, that’s still an exceptionally low level, and a modest increase in the rate. But for a more definitive assessment, come back this time next year.

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Good news: our falling productivity is too bad to be true

There are few aspects of the economy on which more bulldust is spoken than our productivity. The world abounds with people trying to tell us that our productivity performance is a real worry and the way to fix it is to cut their taxes or give them a government handout. Yeah, sure.

These snake oil salesmen (and they’re almost always men) have been having a field day lately. Did you know that last financial year, 2022-23, the productivity of our labour actually fell by 3.7 per cent?

Fortunately, some sense arrived this week. The Productivity Commission issued its annual productivity bulletin, providing “the most complete picture to date of the drivers of Australia’s productivity decline over 2022-23,” it said. We now have a clearer understanding of what’s behind the slump, we’re told.

But first, let’s be sure you know what productivity is. It’s a comparison of the economy’s output of goods and services – measured by real gross domestic product – relative to our inputs of raw materials, labour and physical capital (machines, buildings, roads, bridges and so forth).

Our productivity improves when we use the same quantity of inputs to produce a greater quantity of outputs. In other words, it’s a measure of our efficiency.

We can improve our technical efficiency by inventing better machines for workers to work with, thinking of better ways to organise our mines, farms, factories and offices, increasing the skills of our workers, and having the government provide us with better roads and public transport to go about our business.

Usually, we focus on the productivity of our labour, measured by dividing real GDP during a period by the total number of hours employees and bosses worked during the period.

Over the past 28 years, the productivity of our workers increased at the average rate of 1.3 per cent a year. This improvement, when passed on to workers as higher “real” wages – wages growing faster than prices – is the main reason our material standard of living is much higher than our grandparents enjoyed.

The productivity of our labour generally improves a bit almost every year. It can fall a little during recessions, but it’s never fallen by anything like as much as 3.7 per cent. Which may mean the world’s coming to an end, but it’s more likely to mean there’s something funny going on with the figures.

The commission’s first revelation is that the number of hours worked during the financial year grew by an unprecedented 6.9 per cent, whereas the economy’s output of goods and services grew by 3 per cent. So, as a matter of simple arithmetic, our productivity worsened.

Now, before you jump to terrible conclusions, there are a few points to make. The first – which the commission didn’t make, but should have – is that one of the most basic things we expect the economy to do for us is to provide paid employment for all those of us who want to work.

And what happened last financial year is that a lot more people got jobs, and a lot of people working part-time got the extra hours of work they’d been seeking. It’s a safe bet that all those people being paid to work more hours were pleased to oblige.

So, before we beat ourselves up, we need to be clear that the unprecedented rise in hours worked was a good thing, not a bad thing. It was, in fact, part of the economy’s return to full employment for the first time in 50 years. That’s bad?

No, rather than cursing our bad luck or bad management, we should be asking questions: how on earth did that happen? It doesn’t make sense. Employers employ people to produce goods and services, not because they feel sorry for people who need a job.

So, if they increased their labour inputs by 6.9 per cent, how come their output of products increased by only 3 per cent?

When you hire more workers, you usually need to buy more tools and equipment for them to work with. If you don’t bother, then the extra workers won’t be as productive as your existing workers, and your average productiveness will fall.

The commission points out that businesses’ decisions to hire more workers didn’t lead them to acquire an equivalent amount of extra machines and other physical capital. The nation’s ratio of physical capital to labour fell by 4.9 per cent in the year – the biggest recorded decline in our history. “This meant on average, each worker had access to a shrinking amount of capital, which weighed down labour productivity,” it told us.

The point is, if you want productivity to improve, you need an increasing ratio of capital to labour. So, if businesses aren’t increasing their investment in capital equipment and structures sufficiently, don’t be surprised if productivity is getting worse rather than better.

But while I think it’s true that weak business investment is an important part of the explanation for our weak performance on labour productivity over the past decade, I don’t think it’s the reason productivity fell by 3.7 per cent last financial year.

No. One possibility is that while business has hired a lot more workers, it’s taking a bit longer for the increased investment and greatly increased output to come through. This is a common problem with the interpretation of changes in the economy over short periods. Wait a bit longer and the puzzle disappears.

But I think the true explanation is bigger than that – and so does the commission. It points out that, during the pandemic, measured productivity rose rapidly – mostly because high-productivity industries kept working, while low-productivity industries were locked down – but last financial year that measured gain disappeared.

Get it? COVID and our response to it, with lockdowns and economic stimulus, did strange things to the economy and to our measurements of it.

But by about June last year, the level of labour productivity was about the same as it was before the pandemic. We didn’t get much productivity improvement, but nor did we go backwards.

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Jury still out on how much hip pocket pain still coming our way

It’s not yet clear whether the Reserve Bank’s efforts to limit inflation will end up pushing the economy into recession. But it is clear that workers and their households will continue having to pay the price for problems they didn’t cause.

Prime Minister Anthony Albanese didn’t cause them either. But he and his government are likely to cop much voter anger should the squeeze on households’ incomes reach the point where many workers lose their jobs.

And he’ll have contributed to his fate should he continue with his apparent intention to leave the stage-three income tax cuts in their present, grossly unfair form.

The good news is that we’re due to get huge hip pocket relief via the tax cuts due next July. The bad news is that the savings will be small for most workers, but huge – $170 a week – for high-income earners who’ve suffered little from the squeeze on living costs.

Should Albanese fail to rejig the tax cuts to make them fairer, you can bet Peter Dutton will be the first to point this out. But he’ll need to be quick to beat the Greens to saying it.

Those possibilities are for next year, however. What we learnt this week is how the economy fared over the three months to the end of June. The Australian Bureau of Statistics’ “national accounts” show it continuing just to limp along.

Real gross domestic product – the value of the nation’s production of goods and services – grew by only 0.4 per cent – the same as it grew in the previous, March quarter. Looking back, this means annual growth slowed from 2.4 per cent to 2.1 per cent.

If you know that annual growth usually averages about 2.5 per cent, that doesn’t sound too bad. But if you take a more up-to-date view, the economy’s been growing at an annualised (made annual) rate of about 1.6 per cent for the past six months. That’s just limping along.

And it’s not as good as it looks. More than all the 0.4 per cent growth in GDP during the June quarter was explained by the 0.7 per cent growth in the population as immigration recovers.

So when you allow for population growth, you find that GDP per person actually fell by 0.3 per cent. The same was true in the previous quarter – hence all the people saying we’re suffering a “per capita recession”.

As my colleague Shane Wright so aptly puts it, the economic pie is still growing but, with more people to share it, the slices are thinner.

It’s possible that continuing population growth will stop GDP from actually contracting, helping conceal from the headline writers how tough so many households are faring.

But the media’s notion that we’re not in recession unless GDP falls for two quarters in a row has always been silly. What makes recessions such terrible things is not what happens to GDP, but what happens to workers’ jobs.

It’s when unemployment starts shooting up – because workers are being laid off and because young people finishing their education can’t find their first proper job – that you know you’re in recession.

In the month of July, the rate of unemployment ticked up from 3.5 per cent to 3.7 per cent, leaving an extra 35,000 people out of a job. If we see a lot more of that, there will be no doubt we’re in recession.

But why has the economy’s growth become so weak? Because households account for about half the total spending in the economy, and they’ve slashed how much they spend.

Although consumer spending grew by 0.8 per cent in the September quarter of last year, in each of the following two quarters it grew by just 0.3 per cent, and in the June quarter it slowed to a mere 0.1 per cent.

Households’ disposable (after-tax) income rose by 1.1 per during the latest quarter but, after allowing for inflation, it actually fell by 0.2 per cent – by no means the first quarter it’s done so.

What’s more, it fell even though more people were working more hours than ever before. People worked 6.8 per cent more hours than a year earlier.

So why did real disposable income fall? Because consumer prices rose faster than wage rates did. Over the year to June, prices rose by 6 per cent, whereas wage rates rose by 3.6 per cent.

Understandably, people make a big fuss over the way households with big mortgages have been squeezed by the huge rise in interest rates. But they say a lot less about the way those same households plus the far greater number of working households without mortgages have been squeezed a second way: by their wage rates failing to rise in line with prices.​

This is why I say the nation’s households are paying the price for fixing an inflation problem they didn’t cause. It’s the nation’s businesses that put up their prices by a lot more than they’ve been prepared to raise their wage rates.

Businesses have acted to protect their profits and – in more than a few cases – actually increase their rate of profitability. In the process, they risk maiming the golden geese (aka customers) that lay the golden eggs they so greatly covet.

If you think that’s unfair, you’re right – it is. But that’s the way governments and central banks have long gone about controlling inflation once it’s got away. It was easier for them to justify in the olden days – late last century – when it was often the unions that caused the problem by extracting excessive wage rises.

But those days are long gone. These days, evidence is accumulating that the underlying problem is the increased pricing power so many of our big businesses have acquired as they’ve been allowed to take over their competitors and prevent new businesses from entering their industry.

The name Qantas springs to mind for some reason, but I’m sure I could think of others.

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Wellbeing? Measure what matters, then start fixing it

In this rushing world, it’s easy for the new, the exciting, the entertaining or the worrying to crowd out the merely important. But that’s one reason mastheads have columnists. To say, hey, don’t overlook this, it’s important.

If, like all sensible people, you think there’s more to life than gross domestic product – more than “the economy”, narrowly defined – you need to take more notice of Treasurer Jim Chalmers’ long-promised Measuring What Matters wellbeing framework, released on Friday.

Taken as just another news story, it was a remarkably unremarkable document. It gathered 50 statistical indicators of Australians’ wellbeing, only a few of which were the standard economic indicators.

Of these, 20 show an improvement since the early 2000s, 12 have deteriorated, while the rest have shown little change or mixed outcomes. Our headline shouted the astonishing news: “We’re living longer, but cuddly animals are on the decline.”

Meanwhile, the government’s unceasing critics had much sneering fun pointing out how outdated some figures were. Did you see they say home owners are finding it easier to repay their mortgages?

Hopeless. It’s obviously just Labor’s “pitch to progressives living in Green and teal colonies”.

Actually, it’s a genuine effort to acknowledge and pay more attention to all the aspects of our lives that matter in addition to how many of us have jobs, how much we earn and what we’re spending it on.

The people who know a lot and care a lot about our wellbeing, in all its dimensions – such as Warwick Smith, director of the Centre for Policy Development’s Wellbeing Initiative – were much less critical. They said it was a good start, and could be improved and built upon, with the ultimate objective of having our greater consciousness of these other priority areas doing more to influence what the government was spending its time trying to improve.

Few economists would disagree with the frequent claim that GDP isn’t a good measure of wellbeing or progress. Indeed, the first person to say it was the bloke who invented GDP in the 1930s, Simon Kuznets.

It’s just that, economists being economists, they’ve continued to focus on GDP – economic growth – and left the better measures of wellbeing to others. Politicians have continued to focus on economic growth because that’s what the rich and powerful care most about. They’re hoping it will make them richer and more powerful.

It’s precisely because our leaders have been so focused on GDP as a measure of economic growth that our economic statistics are comprehensive and up to date, but our measurements of other things aren’t.

So, getting fair dinkum about “measuring what matters” involves giving the Australian Bureau of Statistics more money to measure the other things that matter more fully and more frequently.

Having been a bean counter in both my careers, I know the boring, pettifogging importance of measurement. As they say, what gets measured gets managed. You want to get your map sorted before you take off into the jungle.

But what are the other, non-standard things that matter most to our wellbeing? This is what we got on Friday: the government’s decision about the key components of wellbeing. This is the wellbeing “framework”.

It nominates five dimensions of wellbeing. First, health. “A society in which people feel well and are in good physical and mental health, can access services when they need, and have the information they require to take action to improve their health,” the framework says.

Second, security. “A society where people live peacefully, feel safe, have financial security and access to housing.”

Third, sustainability. “A society that sustainably uses natural and financial resources, protects and repairs the environment and builds resilience to combat challenges.”

Fourth, cohesion. “A society that supports connections with family, friends and the community, values diversity, promotes belonging and culture.”

And finally, prosperity. “A society that has a dynamic, strong economy, invests in people’s skills and education, and provides broad opportunities for employment and well-paid, secure jobs.”

Each of these five “themes” (dimensions is a better word) are “underpinned” by the need for “inclusion, equity and fairness” (but if there’s a difference between equity and fairness, I don’t know it).

I think that covers the bases. Sounds a nice place to live. It puts the economy into a broader, more balanced context. The economy is vitally important – it’s our bread and butter, after all – but so are many other things.

If we nail it on prosperity but go backward on the others, why would that be good? The rich could survey the ruins around them and say, I won!

And there’s a lot of interdependence. Good luck with your economy once you’ve irreparably damaged the natural environment on which it depends.

On many of these dimensions, what we need to know is not so much how well we’re doing on average, but who’s missing out and needs help. Not who’s included, but who’s excluded. (Something a Voice would make it harder to forget.)

But measurement is just a means to an end. Until what we know affects what our governments do, it’s just box-ticking.

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Economy close to stalling, as Reserve hits the brakes yet again

It’s been a puzzling week, as we learnt the economy had slowed almost to stalling speed, just a day after the Reserve Bank raised interest rates for the 12th time, and warned there may be more.

According to the Australian Bureau of Statistics’ “national accounts”, real gross domestic product – the economy’s production of goods and services – grew by just 0.2 per cent over the three months to the end of March.

That took growth over the year to March down to 2.3 per cent, which sounds better than it is because the economy has slowed so rapidly. If it continued growing by 0.2 per cent a quarter, that would be annual growth of 0.8 per cent.

And the resumption of immigration means the population is now growing faster than the economy. Allow for population growth and GDP per person actually fell by 0.2 per cent. Over the year to March, it grew by only 0.3 per cent.

While a growing population is good for businesses – they have more potential customers – to everyone else, economic growth has been sold to us as raising our material standard of living. Not much chance of that if GDP per person is falling.

The Reserve Bank has been trying to slow the economy down because demand for goods and services has been growing faster than the economy’s ability to supply them, thus allowing businesses to increase their prices.

With additional help from the rising prices of imported goods and services, the rate of inflation has shot up. It’s started falling back from its peak of 7.8 per cent at the end of last year, but is still way above the Reserve’s 2 per cent to 3 per cent target range.

The Reserve’s been raising the interest rates paid by the third of households with mortgages, to reduce their ability to spend on other things. But, at this stage, probably the biggest dampener on consumer spending is coming from the failure of wages to keep up with rising prices.

“Demand” means spending, so if households find it harder to spend on goods and services, that makes it harder for businesses to raise their prices, thus bringing the inflation rate back down.

And remember that the full effect of all the interest rate rises we’ve seen is still to be felt. The pain will increase over the rest of this year.

But if I were Reserve Bank governor Dr Philip Lowe, I wouldn’t be too worried that the plan wasn’t working. The biggest single factor driving GDP is consumer spending, which accounts for more than half of all spending. In the June quarter last year, it grew by 2.2 per cent.

The following quarter its growth fell to 0.8 per cent, then 0.3 per cent, and now 0.2 per cent. Wow. I think the squeeze is working.

Although more people have been working more hours, real household disposable income fell by 0.3 per cent in the quarter, and by 4 per cent over the year to March.

It was hit by the failure of wages to rise in line with prices, by the doubling in households’ interest payments, and by the bigger bite that income tax took out of pay rises, caused by bracket creep.

How did households manage to keep their consumption spending growing despite their falling real income? By cutting the proportion of their income that they were saving from more than 11 per cent in March quarter last year to less than 4 per cent this March quarter – the lowest it’s been in about 15 years.

Household investment spending on newly built homes and alterations fell by 1.2 per cent, its sixth fall in seven quarters.

One bright spot was growth in business spending during the quarter of 2.9 per cent, led by spending on machinery and equipment, and non-dwelling construction – particularly on renewables and electricity infrastructure.

Unfortunately, much of the machinery investment was on imported equipment that had been delayed by the pandemic, so it’s not a sign of continuing strength. The volume of spending on imports was a super-strong 3.2 per cent, but imports subtract from GDP, of course.

Treasurer Jim Chalmers always blames the economy’s slowdown on higher interest rates (blame the Reserve, not me), high inflation (not me either) and “a slowing global economy” (blame the rest of the world).

A slowing global economy? Yes, of course. Everyone’s heard about that. Trouble is, the main way the rest of the world affects us is by buying – or not buying – our exports. And the volume of our exports grew by 1.8 per cent in the March quarter, and 10.8 per cent over the year to March. That’s because our miners have done so well (and our fossil-fuel-using households and businesses so badly) out of the higher world coal and gas prices caused by the Ukraine war.

Even so, this quarter’s growth in export volumes of 1.8 per cent has been swamped by the 3.2 per cent growth in import volumes, meaning that “net exports” – exports minus imports – subtracted 0.2 percentage points from the overall growth in real GDP during the quarter.

After Lowe’s decision on Tuesday to raise rates yet again, Chalmers wasn’t mincing his words. “I do expect that there will be a lot of Australians who find this decision difficult to understand and difficult to cop – ordinary working Australians are already bearing the brunt of these interest rate rises, they shouldn’t bear the blame too,” he said.

“The Reserve Bank’s job is to quash inflation without crashing the economy, and they will have a lot of time and opportunities to explain and defend the decision that they’ve taken today.”

Lowe has said repeatedly that he’s seeking the “narrow path” where “inflation returns to target within a reasonable timeframe, while the economy continues to grow, and we hold on to as many of the gains in the labour market [our return to full employment] as we can”.

After seeing the next day’s GDP figures, Paul Bloxham of HSBC bank observed that the narrow path “is looking extremely narrow indeed”. True.

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Can the critics prove higher profit margins are fuelling inflation?

There’s a big risk we’ll fail to learn a vital lesson from our worst inflation outbreak in decades. If inflation is such a scourge that we must pay a terrible price to get it back under control, why do we do so little to stop big companies from acquiring the power to raise their prices by more than needed to cover their rising costs?

Economists are far more comfortable thinking about inflation at the top, macro level than the bottom, micro level. At the top, inflation is caused by aggregate (total) demand for goods and services growing faster that aggregate supply – the economy’s ability to produce those goods and services.

We know from Reserve Bank figuring that more than half the price rise we’ve seen has come from temporary disruptions to the supply of production inputs, caused by the pandemic and the Ukraine war.

But, the Reserve insists, prices have also risen because demand’s been stronger than it should have been. Why? Because in our efforts to hold the economy together during the pandemic, we applied far more economic stimulus than was needed.

Economists – even those who stuffed up the stimulus – are comfortable with this explanation because it puts the blame on government. The model of the economy they carry in their heads tells them the market usually works fine, whereas it’s government intervention in the market that usually causes the problems.

So, you can see why economists were so discombobulated when one of the world’s top macroeconomists, Olivier Blanchard, tweeted about “a point which is often lost in discussions of inflation”. “Inflation,” he wrote, “is fundamentally the outcome of the distributional conflict between firms, workers and taxpayers.”

He’s saying economists need to look at the more fundamental, bottom-up factors driving inflation. Is worsening inflation caused by workers and their unions successfully demanding real wage rises higher than the increasing productivity of their labour justifies?

Or is the strength of competition insufficient to do what the mental model promises: prevent firms from raising their prices beyond what’s needed to cover their higher costs (including a “normal” return – profit – on the capital invested by their owners)?

The strange fact is that economists and econocrats have a long history of lecturing workers and unions on the need for wage restraint. Reserve Bank governor Dr Philip Lowe has been saying workers must be “flexible” and accept wage rises far less than the rise in consumer prices. That is, take a big pay cut in real terms.

But economists are infinitely more reticent in urging businesses to go easy with their price rises. I suspect this is partly because of the biases hidden in their mental model, but mainly because they know their employer, or the big-business lobby, or its media cheer squad, or all the business people on the Reserve’s board, would tear into them for daring to say such a thing.

Similarly, economists have insisted the Australian Bureau of Statistics publish any number of different measures of wage growth, but few measures of profit growth.

Last month, Dr Jim Stanford, of the Australia Institute, sought to even things up a bit by publishing figures that broke the inflation rate up into the bit caused by rising wages and the bit caused by rising profits.

He found that “excess corporate profits account for 69 per cent of additional inflation beyond the Reserve Bank’s target”, whereas rising labour costs per unit of production (that is, after adjusting for the productivity of labour) account for just 18 per cent.

What? Huh? Never seen an exercise like that before. How’d he cook that up? The business lobby went on the attack and the business press consulted a few economists who lazily dismissed it as nonsense.

But though it’s unfamiliar, it’s not as weird as you may think. Stanford was copying the method used by some crowd called the European Central Bank. What would they know?

Well, OK. But how can you take the rise in the prices of products over a period and “decompose” it (break it down) into the bit caused by rising wage costs and the bit caused by rising profits?

By taking advantage of the fact that, every time we measure the growth in gross domestic product in the “national accounts”, we measure it three different ways.

First, the growth in the nation’s expenditure on goods and services. Second, the growth in the nation’s income from wages, profits and other odds and sods. Third, the growth in the production of goods or services by each of our 19 different private and public sector industries.

In principle, each way you measure it gives you the same figure for GDP. Then you use a “deflator” to divide the growth in nominal GDP between the bit caused by higher prices and the bit caused by higher quantities – the “real” bit.

So, it’s quite legitimate to take this measure of inflation and break it up between higher wages and higher profits (leaving the bit caused by changes in taxes and subsidies).

Actually, the stats bureau’s been doing this exercise for wages (“nominal unit labour costs”) for decades, but not doing it for profits (because no one’s been keen to know the results).

Note that the “GDP deflator” is a quite different measure of inflation to the one we usually focus on: the index of consumer prices.

Note, too, that the Ukraine war has caused a huge jump in the profits of our energy producers. This windfall hasn’t been caused by businesses sneaking up their profit margins (“mark-ups”, as economists say). But the growth in mining industry profits accounts for only about half the rise in total profits over the three years to December 2022.

I’m not comfortable relying on a think tank for these figures. But if the economists who champion big business don’t like it, they should take this exercise seriously and join the debate. The government should ask the stats bureau to finish doing the numbers itself.

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Now the hard part for the RBA: when to stop braking

In economics, almost everything that happens has both an upside and a downside. The bad news this week is that the economy’s growth is slowing rapidly. The good news – particularly for people with mortgages and people hoping to keep their job for the next year or two – is that the slowdown is happening by design, as the Reserve Bank struggles to slow inflation, and this sign that its efforts are working may lead it to go easier on its intended further rises in interest rates.

But though it’s now clear the economy has begun a sharp slowdown, what’s not yet clear is whether the slowdown will keep going until it turns into a recession, with sharply rising unemployment.

As the Commonwealth Bank’s Gareth Aird has said, since the Reserve Bank board’s meeting early last month, when it suddenly signalled more rate rises to come, all the numbers we’ve seen – on economic growth, wages, employment, unemployment and the consumer price index – have all come in weaker than the money market was expecting.

What’s more, he says, only part of the Reserve’s 3.25 percentage-point rate increase so far had hit the cash flow of households with mortgages by the end of last year.

“There is a key risk now that the Reserve Bank will continue to tighten policy into an economy that is already showing sufficient signs of softening,” Aird said.

That’s no certainty, just a big risk of overdoing it. So while everyone’s making the Reserve’s governor, Dr Philip Lowe, Public Enemy No. 1, let me say that the strongest emotion I have about him is: I’m glad it’s you having to make the call, not me.

Don’t let all the jargon, statistics and mathematical models fool you. At times like this, managing the economy involves highly subjective judgments – having a good “feel” for what’s actually happening in the economy and about to happen. And it always helps to be lucky.

This week, the Australian Bureau of Statistics’ “national accounts” for the three months to the end of December showed real gross domestic product – the economy’s production of goods and services – growing by 0.5 per cent during the quarter, and by 2.7 per cent over the calendar year.

If you think 2.7 per cent doesn’t sound too bad, you’re right. But look at the run of quarterly growth: 0.9 per cent in the June quarter of last year, then 0.7 per cent, and now 0.5 per cent. See any pattern?

Let’s take a closer look at what produced that 0.5 per cent. For a start, the public sector’s spending on consumption (mainly the wage costs of public sector workers) and capital works made a negative contribution to real GDP growth during the quarter, thanks to a fall in spending on new infrastructure.

Home building activity fell by 0.9 per cent because a fall in renovations more than countered a rise in new home building.

Business investment spending fell by 1.4 per cent, pulled down by reduced non-residential construction and engineering construction. A slower rate of growth in business inventories subtracted 0.5 percentage points from overall growth in GDP.

So, what was left to make a positive contribution to growth in the quarter? Well, the volume (quantity) of our exports contributed 0.2 percentage points. Mining was up and so were our “exports” of services to visiting tourists and overseas students.

But get this: a 4.3 per cent fall in the volume of our imports of goods and services made a positive contribution to overall growth of 0.9 percentage points.

Huh? That’s because our imports make a negative contribution to GDP, since we didn’t make them. (And, in case you’ve forgotten, two negatives make a positive – a negative contribution was reduced.)

So, the amazing news is that the main thing causing the economy to grow in the December quarter was a big fall in imports – which is just what you’d expect to see in an economy in which spending was slowing.

I’ve left the most important to last: what happened to consumer spending by the nation’s 10 million-odd households? It’s the most important because it accounts for about half of total spending, because it’s consumer spending that the Reserve Bank most wants to slow – and also because the economy exists to serve the needs of people, almost all of whom live in households.

So, what happened? Consumer spending grew by a super-weak 0.3 per cent, despite growing by 1 per cent in the previous quarter. But what happened to households and their income that prompted them to slow their spending to a trickle?

Household disposable income – which is income from wages and all other sources, less interest paid and income tax paid by households – fell 0.7 per cent, despite a solid 2.1 per cent increase in wage income – which reflected pay rises, higher employment, higher hours worked, bonuses and retention payments.

But that was more than countered by higher income tax payments (as wages rose, with some workers pushed into higher tax brackets) and, of course, higher interest payments.

All that’s before you allow for inflation. Real household disposable income fell by 2.4 per cent in the quarter – the fifth consecutive quarterly decline.

That’s mainly because consumer prices have been rising a lot faster than wages. So, falling real wages are a big reason real household disposable income has been falling, not just rising interest rates.

Real disposable income has now fallen by 5.4 per cent since its peak in September quarter, 2021.

But hang on. If real income fell in the latest quarter, how were households able to increase their consumption spending, even by as little as 0.3 per cent? They cut the proportion of household income they saved rather than spent from 7.1 per cent to an unusually low 4.5 per cent.

If I were running the Reserve, I wouldn’t be too worried about strong consumer spending stopping inflation from coming down.

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Weak starting point for next year’s threats to the economy

It’s clear the economy’s started slowing, with the strong bounceback from the lockdowns nearing its end. That’s before we’ve felt much drag from the big rise in interest rates. Or the bigger economies pulling us lower, which is in store for next year.

To be sure, the economy’s closer to full employment than we’ve been half a century. But limiting the decline from here on will be a tricky task for Anthony Albanese and, more particularly, Reserve Bank governor Philip Lowe.

The Australian Bureau of Statistics’ “national accounts” for the three months to the end of September, published this week, showed real gross domestic product – the nation’s total production of goods and services – growing by just 0.6 per cent during the quarter, and by 5.9 per cent over the year to September.

Focus on the 0.6 per cent, not the 5.9 per cent – it’s ancient history. Most of it comes from huge growth of 3.8 per cent in the December quarter of last year, which was the biggest part of the bounceback following the end of the second lockdown of NSW, the ACT and Victoria.

Since then, we’ve had quarterly growth of 0.4 per cent, 0.9 per cent and now 0.6 per cent. That’s the slowing. Quarterly growth of 0.6 per cent equals annualised growth of about 2.5 per cent. That’s about the speed the economy was growing at before the pandemic, which we knew was on the weak side.

Dig deeper into the figures, and you see more evidence of slowing. Strong spending by consumers was pretty much the only thing keeping the economy expanding last quarter. Consumption grew by a seemingly healthy 1.1 per cent, which accounted for all the growth in GDP overall of 0.6 per cent. The various other potential contributors to growth – business investment spending, new home building, exports and so forth – cancelled each other out.

But get this: that growth of 1.1 per cent was half what it was in the previous quarter. And what were the main categories of strong spending by consumers? Spending in hotels, cafes and restaurants was up by 5.5 per cent in the quarter.

Spending on “transport services” – mainly domestic and overseas travel – was up almost 14 per cent. And purchase of cars was up 10 per cent.

Anything strike you about that list? It’s consumers still catching up after the end of the lockdowns, when most people were still earning income, but were prevented from spending it. We couldn’t go out to hotels, cafes and restaurants, interstate travel was restricted, and overseas holidays were verboten.

As for buying a new car, an earlier global shortage of silicon chips and container shipping mean few were coming into the country.

Get it? Much of the strong consumer spending that kept the economy moving last quarter was driven by life getting back to normal after the lockdowns and the easing of pandemic-caused supply shortages. It’s a temporary catch-up, that won’t continue for long.

Now let’s look at what the quarterly accounts tell us about the state of households’ finances. Despite their strong consumer spending, their real disposable income actually fell a fraction during the quarter, taking the total fall over the year to September to 2.6 per cent.

Why did households’ income fall? Because prices rose faster than wages did. How did households increase their spending while their income was falling? By cutting the proportion of their incomes they’d been saving rather than spending.

After the first lockdown in 2020, the household saving rate leapt to more than 19 per cent of disposable income. Why? Because people had lots of income they simply couldn’t spend.

But the rate of saving has fallen sharply since then. And in the September quarter it fell from 8.3 per cent of income to 6.9 per cent – almost back to where it was before the pandemic.

As Callam Pickering, of the Indeed jobs site, explains, “households have been relying on their savings, accrued during the pandemic, to maintain their spending in recent quarters”. Lately, however, they’ve “been hit from all angles, with high inflation, falling [house] prices and mortgage repayments all weighing heavily on household budgets”.

“As household saving continues to ease, the ability of households to absorb the impact of higher prices and rising interest rates will also diminish,” he says.

By the end of September, the hit from higher interest rates was just getting started. Of the 3 percentage-point increase in the official interest rate we know has happened, only 0.75 percentage points had yet reached home borrowers.

So, the hit to growth from government monetary policy is only starting. As for the other policy arm, fiscal policy, we know from the October budget it won’t be helping push the economy along. And in the September quarter, falling spending on infrastructure caused total public sector spending to subtract a little from overall growth in GDP.

A similar subtraction came from net exports. Although the volume of exports rose by 2.7 per cent during the quarter, the volume of imports rose by more – 3.9 per cent. A big part of this net subtraction came from the reopening of our international borders. Our earnings from incoming travellers rose by 18.6 per cent, whereas the cost of our own overseas travel jumped by 58 per cent.

Finally, self-righteous business people are always telling us that if we want to real wages to rise rather than fall, there’s an obvious answer: we’ll have to raise our productivity.

Sorry, not so simple, preacher-man. The accounts show that real labour costs to employers per unit of output fell by 2.6 per cent over the year to September.

Meaning that after allowing for the productivity improvement the nation’s employers gained, the increase in wages and other labour costs were a lot less than the increase in the prices they charged.

This suggests business profits are much better placed to weather next year’s hard times than their workers’ and customers’ pockets are. Not a good omen.

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One small step for the wellbeing budget, giant leap yet to come

Hey, wasn’t this budget supposed to be Australia’s first “wellbeing” budget? Whatever happened to that? Well, it happened – sort of – but it turned out to be ... underwhelming. Didn’t arouse much interest from the media.

It met the expectations of neither the sceptics nor the true believers. Treasurer Jim Chalmers began talking it up long before he got the job. The treasurer at the time, Josh Frydenberg, thought it was a great joke.

He pictured Chalmers “fresh from his ashram deep in the Himalayas, barefoot, robes flowing, incense burning, beads in one hand, wellbeing budget in the other”.

No robes on budget night. But nor did we see Chalmers make a ringing denunciation of the great god GDP.

No quoting of Bobby Kennedy’s famous words that such measures count “air pollution and cigarette advertising, and ambulances to clear our highways of carnage ... special locks for our doors and the jails for the people who break them [and] the destruction of the redwood and the loss of our natural wonder in chaotic sprawl”.

In short, Kennedy said, “It measures everything except that which makes life worthwhile.”

No, none of that. Nor any condemnation of economic growth or attack on the materialism of our age.

What we got was what Chalmers promised on the day he became treasurer: “It is really important that we measure what matters in our economy in addition to all of the traditional measures. Not instead of, but in addition to. I do want to have better ways to measure progress, and to measure the intergenerational consequences of our policies.”

What we got on budget night was a start to just that. Not a wellbeing budget, but a normal budget with a chapter headed Measuring What Matters.

It kicked off with some stirring rhetoric about how traditional macroeconomic indicators don’t provide a “complete or holistic view of the community’s wellbeing. A broader range of social and environmental factors need to be considered to broaden the conversation about quality of life.”

Then followed a lot of earnest discussion of “frameworks” and other high-level stuff that’s deeply meaningful to bureaucrats, but not the rest of us. It’s not a long chapter, but I had trouble keeping awake – though I may just have been tired at the time.

But don’t get me wrong. Though none of this stuff gets the blood racing, Chalmers is on the right track. It’s just that he’s got a lot further to go before we see anything likely to make much difference.

Let’s start with GDP – gross domestic product. Everything Kennedy said about it is true. Those who say it’s a bad measure of progress or prosperity or wellbeing are right.

But, as every economist will tell you, it was never intended to be. It’s a measure of the value of all the goods and services produced and consumed in Australia over a period, which means it’s also a measure of the total income Australians earn from producing those goods and services.

It counts the cost of the ambulances and tow trucks that attend road accidents, not because accidents are a good thing, but because all the workers involved earn their income by turning up and helping.

If you’d like everyone who wants a job to be able to get one – meaning unemployment is kept low – the managers of the economy need to know what’s happening to GDP to help them achieve that goal.

GDP doesn’t count “the health of our children or the joy of their play” because, apart from the doctors and nurses, the income we earn from that is “psychic”, not something you can bank or spend.

What economists are more reluctant to admit is that their obsession with the ups and downs of GDP – with the purely material aspect of our lives; with getting and spending – has led them to revere GDP as though it measured our wellbeing.

The rest of us have caught the bug from them. This suits the rich and powerful, whose main objective is to get richer and more powerful. They are focused on the purely material, and it makes it easier for them if the rest of us are too.

It doesn’t suit them to have us asking awkward questions about what economic activity is doing to the natural environment – or the climate – why it’s better for so many jobs to be insecure and badly paid, and whether the pace of economic life is extracting an (unmeasured) price from us in stress, anxiety and depression.

So, Chalmers is right. There’s much more to life – to our wellbeing - than just working and spending. If that’s all governments are doing for us, they’re not doing nearly enough.

We put much effort into measuring and thinking about GDP, but need to put a lot more effort into measuring all the other things that affect our lives and how much joy we’re getting.

Business people say that what gets measured gets managed. True – provided politicians take account of those numbers in the decisions they make. Chalmers’ wellbeing budget is still a long way off.

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Consumers and Russians keep the economy roaring - but it can't last

They say never judge a book by its cover. Seems the same goes for GDP. This week’s figures showed super-strong growth in the three months to the end of June. But look under the bonnet and you find the economy’s engine was firing on only two cylinders.

According to the Australian Bureau of Statistics’ “national accounts”, real gross domestic product – the economy’s production of goods and services – grew by 0.9 per cent in the June quarter, and by 3.6 per cent over the year to June.

If that doesn’t impress you, it should. Over the past decade, growth has averaged only 2.3 per cent a year.

The main thing driving that growth was consumer spending. It grew by 2.2 per cent in the quarter and by 6 per cent over the year, as the nation’s households – previously cashed up by government handouts, and by most people keeping their jobs and others finding one, but prevented from spending the cash by intermittent lockdowns and closed state and national borders – kept desperately trying to catch up with all they’d been missing.

The other big contribution to growth during the quarter came from a 5.5 per cent jump in the “volume” (quantity) of our exports. Most of the credit for this goes to that wonderful man Vladimir Putin, whose bloody invasion of Ukraine has greatly disrupted world fossil fuel markets, thus greatly increasing our sales of coal and gas.

(It has also greatly increased the world prices of coal and gas and grains, causing our “terms of trade” – the prices we receive for our exports relative to the prices we pay for our imports – to improve by 4.6 per cent during the quarter, to an all-time high.)

But that’s where the good news stops. The other cylinders driving the economy’s engine have been on the blink. A marked slowdown in the rate at which businesses were building up their inventories of raw materials and finished goods led to a sharp slowdown in goods production.

Government spending took a breather, and an increase in business investment in new plant and equipment was offset by a fall in business investment in buildings and other construction.

And then there’s what happened to home building. Despite a big pipeline of homes waiting to be built, building activity actually declined by 2.9 per cent in the quarter and 4.6 per cent over the year.

Huh? How could that happen? Well, the builders say they couldn’t find enough building materials and tradies. Which hasn’t stopped them using the opportunity to whack up their prices. (I believe this is called “capitalism”.)

So, while we listen to lectures from the economic managers about the evil of inflation and how it leaves them with no choice but to slow everything down by jacking up interest rates, let’s not forget that the big jump in the cost of new homes and renovations has been caused by... them.

They’re the ones who, at the start of the pandemic and the lockdowns, decided it would be a great idea to rev up the housing industry, by offering incentives to people buying new houses, and by cutting the official interest rate to near zero. Well done, guys.

Speaking of higher interest rates being used to slow down the growth in demand for goods and services, the first two of the five rises we’ve had so far would have had little influence on what happened in the economy over the three months to June.

But don’t worry, they’ll have their expected effect in due course. Which is the first reason the strong, consumer-led growth we saw last quarter won’t last, even if we see more of it in the present quarter.

Another reason is that households are running on what a cook would call stored heat. During the first, national lockdown, the proportion of household disposable (after-tax) income that we saved rather than spent leapt to almost 24 per cent.

We’ve been cutting our rate of saving since then, and it’s now down to 8.7 per cent. This isn’t a lot higher than it was before the pandemic. And with the gathering fall in house prices making people feel less wealthy, it wouldn’t surprise me to see people feeling they shouldn’t cut their rate of saving too much further.

And that, of course, is before we get to the other great source of pressure on households’ budgets: consumer prices are rising faster than workers’ wages. This no doubt explains why our households’ real disposable income has actually fallen for three quarters in a row.

With businesses putting up their prices, but not adequately compensating their workers for the higher cost of living, it’s not surprising so many people are taking more interest in what the national accounts tell us about how the nation’s income is being divided between capital and labour, profits and wages.

ACTU boss Sally McManus complains that workers now have the lowest share of GDP on record. It follows that the profits share of national income is the highest on record.

What doesn’t follow, however, is that any increase in profits must have come at the expense of workers and their wages. Profits are up this quarter mainly because, as we’ve seen, our miners’ export prices are way up, and so are their profits.

No, the better way to judge whether workers are getting their fair share is to look at what’s happened to “real unit labour costs” – employers’ labour costs, after allowing for inflation and the productivity of labour (that’s the per-unit bit).

Turns out that, since the end of 2019, employers’ real unit labour costs have fallen by 8.5 per cent. If workers were getting their fair share, this would have been little changed.

Short-changing households in this way is not how you keep consumer spending – and businesses’ turnover – ever onward and upward.

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