Australia’s “Positive” GDP Figures are an Illusion

Another quarter passes and the headlines greet us with the news of stronger than expected GDP growth.

ABC News Article

Source: ABC News

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In days past, this ‘good’ news was cause for celebration.

But not now. People are starting to realise that the GDP number is a worthless measure of personal well-being. The GDP numbers are a construct by statisticians for politicians.

According to The Sydney Morning Herald on 9 September 2018…

CEDA’s ( Committee for Economic Development of Australia) chief executive, economist Melinda Cilento, says the official narrative about GDP growth – an aggregate, economy-wide measure – just isn’t resonating. It is not a meaningful indicator of progress for most Australians.

“I think people are saying ‘26 years of growth, great, but what matters to me is my experience right here, right now and that aggregate [GDP] number is not a proxy for my sense of improved living standards’,” says Cilento.

And the reason people are buying the ‘good’ news story is because they see their savings dwindling and debt levels rising. And think…if these are the ‘good’ times, I’d hate to see the bad ones.

This is an extract from the ABC News article (emphasis is mine)…

Australian economic growth has picked up pace, growing by 3.4 per cent in the year to the end of June fuelled by consumer spending and financed by shrinking household savings.’

Just how much have households savings shrunk by?

The following chart is from the ABS June 2018 report ‘Australian National Accounts: National Income, Expenditure and Product’.

Household saving ratio

Source: ABS

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Here’s an extract from the report (emphasis is mine)…

The household saving ratio is 1.0% in the June quarter 2018, which is at its lowest since December quarter 2007. This was due to continued strength in household final consumption expenditure (0.9%) alongside more moderate growth in household disposable income (0.4%).

Couple of things here.

The December quarter 2007 was when the All Ordinaries peaked at 6828 points. Is that an ominous sign of history about to repeat itself?

Secondly, the savings rate has been in steady decline since late 2014.

And the reason for that becomes obvious from the following chart published in The Sydney Morning Herald...

Graph of Annual wage growth

Source: Sydney Morning Herald

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The trend in wage growth had its steepest decline in the period June 2012 to December 2013.

As a consequence, households started raiding the ‘piggy bank’.

In addition to depleted savings, households have maintained a steady appetite for debt.

Australia could be headed for a recession in 2019. But there’s a few steps you can take now to protect your family’s wealth. Find out more here.

Australian’s are addicted to credit

The demand for Consumer Credit (housing debt, credit cards, personal loans), since the credit crisis in 2008, has not waivered…we cannot help ourselves.

Australia's consumer credit

Source: Trading Economics

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That extra $1.2 trillion in consumer debt since 2008 (and, the hundreds of billions borrowed by Federal, State and Local Governments) PLUS declining savings, is what’s behind our ‘recession free’ record.

While the politicians rejoice in our freedom from recession, households have sold themselves into debt slavery.

What do we have to show for our history-making run of positive GDP numbers?

Stagnating wage growth. Depleted savings. Record household debt.

Budget deficits at every level of government.

This is not a record we can take any pride in. 

Our lack of financial discipline (skilfully exploited by the finance industry) is cause for national shame…not something we should be proud of.

When you understand the ‘how’ of our GDP growth, you no longer need to wonder ‘why’ the numbers are a meaningless measure (emphasis is mine)…

Mortgage stress has risen as a new record high level of household debt against income is set across Australia, new data by research and analysis group Digital Finance Analytics shows.’

The Australian Financial Review 9 September 2018

For nearly three decades we have become conditioned to living (well) beyond our means.

The longer the period of perceived prosperity, the more we are tempted to bring forward future consumption…which only extends our period in debt servitude.

However, with stagnating wages and interest rates on the uptick, the capacity to borrow in ever increasing amounts is diminishing.

We can dip further into our savings to keep the illusion of ‘growth’ alive, but this too has a finite life.

Free Report: Why Australia’s 26-Year Economic Dream Run is ending. Read now.

How did Australia previously manage to avoid a recession?

We averted a recession after the last credit crisis due to a number of favourable factors…

Federal Government debt was zero.

Interest rates had plenty of room to fall…the cash rates was 7%.

China sanctioned a debt-fuelled ‘spend-a-thon’ that produced a spectacular mining boom.

Household debt was much lower.

Wage growth was closer to 4%.

Thanks to the central banks ‘aggressive’ strategy to encourage ‘all and sundry’ to borrow and spend, those conditions do not exist today.

China does not have the capacity for another credit splurge on that scale. They’ve fired that ‘shot in the locker’.

Interest rates are starting from a much lower number…1.5%.

Households are already feeling the pressure of too much debt and too little relief in their pay packet to be enticed by the RBA to ‘borrow to spend’.

The Federal Government debt is $650 billion and counting.

In relentless pursuit of the positive GDP headline, we have severely weakened our defences against the next crisis. There is precious little resistance left.

When it hits, we’re going to feel the full brunt of it.

There’ll be no escaping from it next time.

And, the next one is going to be far worse than the GFC for one simple reason…global debt has nearly doubled since 2008.

Will it be a default in emerging market (Turkey or Brazil or Argentina) debt or perhaps from China’s shadow banking system that causes the next crisis?

No one knows for sure. But what we do know is the legacy from the response to the Lehman Brothers collapse is a world that is far more indebted than it has ever been in history.

This is not a legacy central bankers can be proud of…and Australia has certainly played its part in this tragic farce.

Regards

Vern Gowdie,
Editor, The Gowdie Letter


Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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