Households’ living standards are still falling as GDP per capita heads for a recession

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Households’ living standards are still falling as GDP per capita heads for a recession


Suburban street scene from above

GDP per capita has shrunk again, putting more pressure on households’ standard of living



If there is one big thing that is keeping the economy from officially going backwards, it is population growth.

Take out the impact of the population, GDP growth is a very line ball call.

GDP per capita shrank in the third quarter and on some forecasts it will shrink again in the fourth quarter — which technically would be a recession of sorts.

The maths is pretty simple.

Australia’s population grows at around 0.4 per cent a quarter (1.6 per cent a year). Quarterly GDP growth of 0.4 per cent delivers no growth on a per capita basis.

Population growth may be terrific for the headline aggregate number, but on an individual household level its impact is diluted by, well, the impact of more people.

Alex Joiner@IFM_Economist

Talk of a per capita GDP “recession” in Q4 is useful to highlight just how reliant Australia has become on this source of growth, at the cost of neglecting productivity growth. Demonstrating this: ’93 to ’08 per capita GDP growth averaged 0.56qoq% since then it’s 0.27qoq%

The consensus call from market economists is for 0.4 per cent growth in the fourth quarter, although many say it could be worse — or “the risks are on the downside”, as they say — after a spate of soft economic data in recent weeks.

Construction work accounts for about 15 per cent of the economy and fell in the last three months of year.

Consumer spending, an even bigger chunk of the economy at almost 60 per cent of GDP, has pretty well stalled.

And despite strong prices and volumes for commodities shipped overseas recently, net exports look like being a drag on Q4 GDP thanks to a kick up in imports over the survey period.

There are still some key GDP building blocks, or partials, to be released in the coming days, but all will be revealed when the Australian Bureau of Statistics drops its weighty National Accounts on Wednesday.

However, anything less than 0.4 per cent GDP over the quarter means in the most basic terms the living standard for the average Australian household has gone backwards for the past six months.


It’s a trend that doesn’t appear likely to change any time soon given house prices are still crumbling and consumer demand remains weak.

Residential construction appears to have peaked. Sliding down the other side may mean job losses, and that could be the start of something much nastier.

Home building has fallen in both the third and fourth quarters, while forward looking dwelling approvals have cratered, down almost 20 per cent in the last couple on months and down a third from their peak in late 2017.

A resilient housing sector is a cornerstone on the Reserve Bank’s relatively rosy call on GDP — which would see Q4 growth of 0.6 per cent, or 2.8 per cent for the year if correct.

Market forecasts

Forecast Q4 GDP (QoQ/YoY) Institution
0.1pc/2.3pc Morgan Stanley
0.2pc/2.4pc AMP, ANZ, NAB, Westpac
0.3pc/2.5pc Indeed, UBS
0.4pc/2.6pc (Median forecast) CBA, RBC, TD Securities
0.5pc/2.7pc Capital Economics, Citi, Deutsche Bank, HSBC
0.6pc/2.8pc Bank of America Merrill Lynch, J.P. Morgan, RBA
0.7/2.9pc Barclays

Source: Reuters

Housing sector retreat

Westpac is just one of the houses to dial down its forecasts on GDP.

Westpac’s Andrew Hanlan noted the economy experienced a considerable loss of momentum from mid-2018.

“Growth was 4 per cent annualised over the first half of the year, slowing to as little as a 1 per cent pace in the second half,” Mr Hanlan said.

“Key to this development is the turning down of the housing sector, as lending conditions were tightened further, and the consumer, constrained by weak wages growth and weighed down by high debt levels and falling house price.”

All pretty gloomy stuff. Not surprisingly, Westpac has pencilled in a way below trend 2.2 per cent for GDP growth through 2019.

Not high quality growth

RBC’s Su-Lin Ong sits on the median forecast of 0.4 per cent, although she thinks it more likely to be an optimistic, rather than pessimistic punt.

“[Q4] is likely to tell a similar story [to Q3], GDP per capita was negative last time in what was a remarkably soft headline number,” she said.

Ms Ong said her forecast is dependent on solid contributions from government spending and inventories, so it is not exactly “high quality” growth.

Buried in the National Accounts is a gem known as the Real Net National Disposable Income Per Capita, which Ms Ong says is one of her preferred metrics to check on the financial wellbeing of the nation.

“It flies a bit below the radar, but last quarter’s fall suggested a loss of wealth and living standards,” Ms Ong said.

Having stalled in the second quarter, it went into reverse in the third.

Prospects for the fourth aren’t great either, although Ms Ong notes a rebound in commodity prices, helping to lift Australia’s terms of trade, may stave off that pocket of the National Accounts slipping into recession.



While households probably do not feel like they reap the benefits of things like more expensive iron ore steaming out of Port Hedland directly, it boosts national wealth in a secondary way.

Higher commodity prices boosts the tax base which should, theoretically at least, be redistributed back via better services and personal and company tax cuts.

Certainly, the century high terms of trade helped finance the Howard government’s tax cuts between 2003 and 2007.

As Ms Ong points out, with disposable income growth slowing by more than spending increased in the third quarter, household savings were inevitably eroded.

It is not a trend that can be sustained for long.

RBA remains on hold

A day before the GDP numbers drop, the Reserve Bank board meets to discuss its monetary setting.

Oddly, it is thing the RBA does every three months. A calamitous result would be dealt with at the subsequent month’s meeting. A bad Q3 GDP number would take a couple of months to address, while the RBA board “chills out” on its summer break.

The RBA hasn’t budged from the record low of 1.5 per cent since August 2016.

No economist surveyed by Reuters said the RBA was ready to blink yet and the market has only a 2 per cent chance of a cut priced in.

The RBA is more likely to be stirred rather than shaken by the likelihood of weaker Q4 GDP growth.

“We expect it will, like us, attribute some of the weakness to temporary factors,” ANZ’s Felicity Emmett said, “but if our forecasts are broadly correct and a lower track for both GDP and household consumption are confirmed, the Bank could be forced to downgrade its forecasts again in May’s Statement on Monetary Policy.”

Ms Emmett says unemployment is the key to what happens next.

If it stays put, so will the RBA. If unemployment falls, the RBA will jacks rates up, if it rises sharply, the RBA cuts to a new record low.

Markets remain bullish

The bulls are still enjoying their solid start to year as central banks around the world continue to make life and money a bit easier for them.

After three days of largely profit taking, Wall Street finished solidly on Friday to end up 0.4 per cent ahead on the week.

The ASX was up a similar amount. Futures trading over the weekend points to a solid start to the week as well.

Elsewhere the signals were mixed.

China trotted out some pretty poor manufacturing data, but its equity markets finished the week up almost 7 per cent.

As expected the US delayed Friday’s scheduled hike in tariffs on $200 billion worth of Chinese goods, as trade talks continued to make progress.

The Shanghai composite was also given a leg-up by the global index provider MSCI lifting the weighting A-shares in its indexes later this year. That will oblige many funds, particularly the big and agnostic Exchange Traded Funds, to hold more Chinese shares regardless of their merit.

MSCI said it will quadruple the weighting of Chinese large-cap stocks. That will see China’s A-shares take up 3.3 per cent of the $US5.3 trillion MSCI Emerging Market Index by November.

That could draw in more than $US80 billion of fresh foreign inflow from index hugging investment funds, according to some analyst estimates.

In commodities, iron ore eased down from recent highs above $US90 a tonne as Chinese steel mills reportedly set out in search of cheaper (and lower quality) supplies.

Oil also slipped despite reports on Friday OPEC had cut its production by 300,000 barrels a day over February.


Date Event Comment/Forecast


Company profits Q4: Solid rise of 3pc QoQ expected supported by mining profits
Inventories Q4: Not a “high quality” component of growth, but likely to support GDP this time
Building approvals Jan: Forward indicator of building activity, weakness likely to continue
Metcash FY result A fairly flat FY cash profit of $210m forecast


RBA rates meeting No change, but statement should be interesting
Net exports Q4: Likely to subtract from GDP after recent strength of imports
Current account Q4: Deficit should narrow to around $9b, down from $10.7b


GDP Q4: Market forecast is for 0.4pc QoQ (2.6pc YoY), the RBA is at 0.6pc
RBA speech RBC governor Philip Lowe speaks in Sydney on “The housing market and the economy”


Trade balance Jan: A monthly surplus around $3b, held up by solid commodity exports
Retail sales Jan: Market consensus is 0.2pc growth MoM. Not great


Date Event Comment/Forecast


OECD outlook Latest look from OECD about developed economies prospects
US: Trade balance Dec: Another big deficit ( around $US49b) but narrowing


EU: ECB rates meeting No change
EU: GDP Q4: Still pretty weak, 1.2pc YoY


US: Employment Feb: Non-farm payrolls +170K ( down on 300K in Jan), unemployment 4pc, wage growth 3pc
CH: Trade balance Jan: Exports likely to fall again, while imports may pick up after a very weak December