By Ken Wolff

Prime Minister Malcolm Turnbull declared that GDP growth of 3.1%, reported by the ABS on 1 June, showed that his plan for the economy was on track:

You cannot succeed without a clear economic plan. Everything we have is encouraging companies to invest, to employ.

So far so good.

This confirms the direction we are leading the country in, in terms of our economic plan, but there is much more work to do.

[from The Guardian’s live election blog on 1 June]

But did he read the fine print?

As reported by the ABC:

However, while the headline number was strong, it was driven by a rise in output, while the prices Australia got for its exports continued to fall relative to imports.

That saw the terms of trade decline another 1.9 per cent in the quarter, and 11.5 per cent over the past year, which in turn saw the real net national disposable income rise by just 0.2 per cent over the quarter and plunge 1.3 per cent over the past year.

The ABS describes this number as “a broader measure of the change in national economic well-being” and the fall in this figure indicates declining purchasing power for Australian households.

That was picked up by Labor’s Chris Bowen:

Beneath the headline figure, we know there is an economy struggling with falling demand and falling income growth. In these figures today we see the eighth consecutive decline in nominal income: living standards.

Michael Janda, the ABC’s business reporter explained that ‘real’ GDP only measures how much we have produced in goods and services. It is ‘nominal’ GDP that actually gives a measure of the value of those goods and services. As an example, the current GDP figure includes a surge in iron ore and LNG exports but we are getting less dollars for these exports than we did before:

This measure is far more important for households, businesses and governments as it better reflects how much income, profits and revenue they are getting …

Despite that, the initial reaction in the markets was that the Australian dollar rose as overseas financial markets focused only on the headline figure, as that is taken as a global and uniform indicator, but our local share market fell.

Weakness in the economy has been repeated in other recent data from the ABS.

Although the government liked to claim some success for unemployment remaining at 5.7% in April, other labour force figures associated with the release of that data showed:

• the headline figure of 10,800 jobs created actually included the loss of 9,300 full-time positions but an increase of 20,200 part-time jobs
• monthly hours worked in all jobs decreased 17.9 million hours to 1,613.8 million hours, the fourth consecutive decrease (the first time that had happened in three years) and a cumulative decrease of 1.0% since December 2015.

The ABC reported:

Paul Dale from Capital Economics observed that full-time employment has not increased at all over the past three months and that the average number of hours worked per employee per month is at a record low.

“In other words, the quality of the jobs being generated is deteriorating and the amount of work being done is falling,” he wrote in a note on the data.

The April figures reflected similar declines in March when 34,900 part-time jobs were created but 8,800 full-time positions lost, resulting in a loss of 17.5 million hours worked.

It also followed the Wage Price Index for March (released on 18 May) which showed a rise of 0.4%: ‘the lowest rate of wages growth recorded since the start of the series in 1997’ the ABS noted in its commentary.

The Business Indicators for March, released on 30 May, showed the trend estimate for company gross operating profits fell by 3.1% in the quarter, or 4.7% seasonally adjusted: mining fell 9.6% seasonally adjusted; manufacturing 14.5%; and electricity, gas, water and waste services fell 5.6%. There were minor improvements in construction and retail, with both growing by 0.6%. The biggest loss in seasonally adjusted profit estimates was for financial and insurance services which fell by 69.4%.

Those indicators are not good news for the government. Less hours worked translates to lower PAYG income tax revenue and the company profit estimates also indicate lower company tax revenue.

Business investment in the March quarter, as reported by the ABS on 26 May, was down 2.8% for the quarter and down 15.4% over the year. Expectations for future investment in 2016‒17 showed some signs of improvement but, in dollar terms, would still remain below the investment in 2015‒16.

While the trade deficit improved marginally in the March quarter (as compared to the December quarter) the fall in prices for our exports meant that we were still running up foreign debt — now a record $1.03 trillion, or two-thirds of our total GDP. While that is not government debt, it does leave our companies vulnerable to changes in international conditions, particularly increases on the currently low international interest rates. And, of course, if companies (including banks) are hit with higher borrowing costs for overseas loans or refinancing, that will be passed on to consumers in Australia which, in turn, could lead to lower domestic demand and more headwinds for our economy.

Some of this is not supposed to happen, according to economic theory. As a CBA analyst said of the figures:

Today’s figures confirm that the Australian economy finds itself with a unique set of circumstances that will continue to perplex policymakers and complicate the interest rate outlook.

GDP growth is running at an above trend pace and the unemployment rate has been declining. In isolation two highly desirable outcomes. But wages growth is at its lowest level since the 1990s recession and consumer inflation has been falling. On the surface, these four outcomes occurring simultaneously is bizarre. [emphases in original]

[from the Canberra Times ‘Markets Live’ blog on 1 June]

It does go on to suggest that the ‘anomaly’ can be explained by the negative terms-of-trade, soft domestic demand and historically high under-employment, which means there is spare capacity in the labour market.

Most analysts were predicting that GDP growth would come in at 2.8%, so an actual increase of 3.1% was a ‘pleasant’ surprise. Normally such an increase in GDP would be welcome and would indicate a robust economy but all the other data show that the increase in GDP is not being reflected in other improvements, like full-time employment, wages, even business investment, and so is not being reflected in improvements in our standard of living which it normally would.

Of course, Turnbull and Morrison give the figures a positive spin and also offer the line that only their approach will help overcome the poorer aspects but in a report in The Guardian on 1 June, the Council of Small Business Australia estimated that only 4.6% of small businesses would take advantage of the Turnbull/Morrison company tax cut to reinvest and expand their operations. The Council suggested that the instant asset write-off was a better mechanism to encourage expansion — the government is keeping the $20,000 asset write-off until 30 June 2018, instead of ending on 30 June 2017, and will expand it to businesses with a turnover of up to $10 million (currently $2 million).

Also, Goldman Sachs, at which Turnbull was chairman and managing director in Australia between 1997 and 2001, found that 60% of the benefit of Turnbull’s company tax cut would flow to foreign investors, 10% to domestic investors, and only 30% would boost the Australian economy.

Turnbull’s and Morrison’s plan to boost the economy is under pressure. The impact of the tax cut is being questioned, not by Labor but by people in the market that it is aimed at. The economic indicators are mixed but more heavily negative and the benefits of economic growth are not being seen. So where is the economic plan to turn this around and ensure that people actually benefit from an increase in GDP growth? All the growth Turnbull and Morrison promise from their tax cuts and innovation agenda will mean nothing unless they can turn around the other indicators and growth actually provides benefits for all.

The fact is their plan isn’t working and isn’t a plan that will benefit all Australians through a rising standard of living. It is time they found another plan!

What do you think?

How can Turnbull claim his plan will boost the economy in the face of the economic indicators?

If his plan does not lift our standard of living, is it worth the paper it is written on?

Will Turnbull’s blindness as regards social policy come back to bite him?

This article was originally published on TPS Extra.