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Recession? What recession? THIS recession!

By Geoff Carmody - posted Monday, 17 December 2012


In real per capita net national income terms, Australia has been in recession for the first nine months of 2012.

The latest real GDP figures don't tell the full story. The Bureau of Statistics (ABS) adjusts real GDP for changes in our terms of trade that affect our purchasing power. This adjustment produces estimates of real gross domestic income (GDI)

In trend terms, GDI increased by just 0.1% in the September quarter, the same as the estimate for the June quarter, and after zero growth in the March quarter. The increase in the year to the September quarter was only 0.7%. The corresponding real GDP increases were 0.6%, 0.7%, 0.9% and 3.4%, respectively. The difference reflects falls in the terms of trade by 1.4%, 3.4%, 5.4%, and 12.7%, respectively. In the last year, GDI growth was one-fifth of GDP growth.

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Real net national disposable income is a broader measure of changes in Australia's real income. This measure adjusts the ABS real GDP estimate for changes in our terms of trade, real net incomes from overseas, and consumption of fixed capital (physical depreciation, normal obsolescence and accidental damage for fixed assets).

In trend terms, real net national disposable income increased by just 0.2% in the September quarter, after 0.1% in the June and March quarters. The increase in the year to the September quarter was just 1.0%.

Measured in per capita terms, the corresponding changes were declines of 0.3% in the September, June and March quarters, and a reduction of 0.6% in the year to the September quarter of 2012. Over the year to the September quarter 2012, real GDP growth (3.4%) translated into falling per capita real disposable incomes (-0.6%).

In trend terms, the September quarter accounts show flat hours worked over the last year. There was some productivity growth, albeit at slowing rates, and less so in the market sector. Real unit labour costs accelerated over the year to the September quarter of 2012, especially in the non-farm sector.

Slowing GDP growth, falling terms of trade, slowing/poor productivity growth and growing population are combining to shrink Australia's per capita income 'cake'. Aspirations for rising real incomes, or income redistribution (eg, via new tax initiatives in the next Budget to cover Gonski and NDIS reforms), cannot be resolved without distributional conflicts.

How should we deal with this income recession? The first step is to acknowledge it, not ignore it. There has been no official commentary on the abovementioned per capita income statistics (the ABS release aside).

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Without the lubricant of sustainable real per capita income growth overall, increased real incomes in some parts of the economy can only be sustained if incomes elsewhere fall more. Redistribution of incomes via new policy must be a more negative-sum process than it otherwise would be.

What happens if 'losers' from these processes seek to maintain their incomes, either absolutely or relative to others? One possibility is increased unemployment as total income demands exceed the capacity of Australia's economic 'cake' to pay them. People are priced out of employment. Alternatively, unaffordable bidding-up of incomes induces increased inflation. A third possibility is both of these macro-outcomes. All three are in play around the world today.

As in Europe, I suspect we'll see increased unemployment first. Facilitated by accommodative macro-policy globally, inflation will eventually increase. Finally, as attempts are made to deal with inflation, we may see economies, including Australia, slide into a low growth, high unemployment, and high-ish inflation path.

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An edited version of this article was published in the Australian Financial Review on December 6, 2012.



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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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