Australia’s Hidden Economic Indicator

Let’s take a look at Australia’s miracle economy. It grew 1.3% in the three months to March and expanded 4.3% over the past 12 months. The crowd’s response was to buy the dollar and stocks, and ease up on predictions of further interest rate cuts.

But a more logical response would be to question why, if things are so good, does it not feel that way? Why is the market struggling? Why are house prices falling? Why do we despise our political leaders so much? Are Australians just spoilt whingers?

There’s no doubt that Australians have become far more materialistic in the last decade or so. Material wealth (largely from the commodities boom) brings with it a desire for material gain. Easy credit leverages that desire and many people soon realise that debt lies on the other side of the wealth coin.

Our hunch is that we’re realising that material wealth, backed by debt, is not all that it’s cracked up to be. In a deleveraging market debt-backed wealth is fleeting but the debt itself is as solid as the Rock of Gibraltar.

Debt forces us to work long hours. It forces us to do things we don’t like, and take orders from people we’d rather smack in the face. It creates resentment. It erodes wealth and in some cases erodes real wealth – the love in a family home.

But the Australian economy is growing strongly right? This should allow us to service and pay off the debt…so stop whinging!

It’s not as straightforward as that. GDP, the official measure of economic growth, is a volume measure. It measures the quantity of goods and services produced. More is not necessarily better. With Australia being a small, open economy, highly exposed to world commodity prices, there is another measure we’d prefer to focus on.

It’s published by the Australian Bureau of Statistics in the same set of accounts as the headline GDP data. As far as we’re concerned, it paints a much more accurate picture of what’s going on in the Aussie economy. It explains the stock market performance and why interest rates are falling despite the apparently robust economy.

The measure is ‘real net disposable income’. We’ve discussed it here before. Yesterday we used it to show our Sound Money. Sound Investments subscribers why they shouldn’t get too excited by the ‘economic boom’ news.

Real net disposable income adjusts GDP for a few things, but the main adjustment is for changes in the terms of trade. As you probably know, the terms of trade hit all-time highs in 2011, mainly due to record iron ore and coal prices. A rising terms of trade adds to national income. The GDP volume measure doesn’t pick this up. But rising incomes affect the economy, the dollar and interest rate policy.

If you look at the chart below, you’ll see that real net disposable income surged in 2010 on the back of China’s stimulus. During this time RBA Governor Glenn Stevens raised interest rates consecutively despite complaints of a struggling economy.

Now the situation has reversed. During the March quarter, seasonally adjusted real net national disposable income was flat…as in zero growth. The terms of trade fell 4.8% in the March quarter. That’s why Stevens has cut interest rates.

So while the headline number shows the Australian economy humming along, this hidden measure tells you the real story of what’s going on. And that is a story of a sharply slowing economy driven by a credit bust in China.

Australia’s Hidden Economic Indicator

Australia's Hidden Economic Indicator

Source: Australian Bureau of Statistics


Greg Canavan
for Markets and Money

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Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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Rick W

Australian GDP grew AUD37bn from March 2011 to March 2012. At the same time the current account went backwards AUD124bn. So for every extra dollar the country owes to the rest of the world there was a a 30 cent increase in GDP.

There is a lot of hope that the investment will have a payback but the country is a long way from paying its own way.

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