Public spending holds off a recession in name only

From Challenger Chief Economist Dr Jonathan Kearns

GDP in the September quarter grew by just 0.3%, and 0.8% over the year, again falling short of expectations. Private sector spending went backwards with both household consumption and business investment falling. Spending by the public sector was the only thing contributing strongly to growth. Public consumption and public investment both grew strongly, each contributing 0.3 percentage points to quarterly GDP growth. The weakness in household consumption, and strength in public spending, were partly driven by electricity subsidies, but they do reflect genuine underlying spending.

This strength in public spending and weakness in private spending continues the theme over the past year and a half. Household consumption and private investment both recovered quickly from the pandemic, but for the past six quarters consumption has flatlined and investment spending slowed. In contrast, over that time annualised growth in government consumption and investment have been 4.6% and 6.8%. Without strong public spending aggregate GDP would have fallen and quite likely met the ‘two negative quarters of growth’ definition of a recession.

With weak GDP growth, and strong population growth, GDP per capita continues to decline. Over the past seven quarters, GDP per capita has fallen by 2%, reducing living standards. Declining living standards is a more useful definition of a recession. Over the past 60 years, the current decline in GDP per capita, ranks behind only two sharp drops in the 1970s, the short, sharp fall in the pandemic and the significant recessions in the early 1980s and early 1990s. It is starting to rank as a significant deterioration in living standards.

There has been no measured growth in productivity since before the pandemic. While weak measured productivity is the direct consequence of soft GDP and resilient employment, these three key measures are certainly sending mixed messages about the economy. GDP is hard to measure and it’s possible that it will later be revised higher. The challenge for the RBA is that while economic growth is weak, the direct consequence of that is very weak productivity growth which will delay the easing in inflation, and so the timing of interest rate cuts.