Has Australia Really Had a 28-Year Expansion? (Yes!)

It’s often said that Australia hasn’t had a recession in nearly 30 years. Paulina Restrepo-Echavarria and Brian Reinbold of the Federal Reserve Bank of St. Louis take a closer look. If a recession is defined as two quarters of negative growth in GDP then the claim is true but if you define a recession as two quarters of negative growth in GDP per capita then there have been three such recessions since 1991: circa 2000-2001, 2005-2006 and 2018-2019.

Line Chart Showing Australia Real GDP Per Capita Growth Rate from 1960 - 2015

Most countries, however, have had more recessions when measured in GDP per capita than in GDP and Australia still looks comparatively good on this measure. Moreover, the official definition of a US recession is not two quarters of negative growth in real GDP it’s the more holistic

A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Did Australia have three recession since 1991 by this measure? It’s difficult to say but I would look more to unemployment rates. The following graph shows Australian real GDP growth rates in purple measured quarterly, real GDP per capita in green measured annually and the unemployment rate in blue. (The data is not identical to Restrepo-Echavarria and Reinbold (RER) as I use FRED data and the FRED economists do not!). As per RER the purple line is generally above the green so you are more likely to see recessions in GDP per capita than in GDP. Take a look at the unemployment rate, however. The 2005-2006 Australian “recession” is completely absent in unemployment so I would rule that out. I also do not see any recession as measured by unemployment in 2018-2019, perhaps it is coming but I would rule it out as of today. The unemployment measure clearly identifies recessions circa 2001-2002 which agrees with RER and also in 2008-2009 where RER do not identify a recession!. Thus, the RER identification of recessions doesn’t work very well as it has both false positives and false negatives.

On the larger issue of Australian economic performance, at worst, I would identify two mild recessions since 1991, circa 2001-2002 and 2008-2009. Now look again at the graph. The shading is US recessions! The Australian and US economies are united enough and subject to similar enough shocks that US recession dating clearly picks out Australian recessions as measured by increases in unemployment rates.

The bottom line is that however you measure it, Australian performance looks very good. Moreover RER are correct that one of the reasons for strong Australian economic performance is higher population growth rates. It’s not that higher population growth rates are masking poorer performance in real GDP per capita, however, it’s more in my view that higher population growth rates are contributing to strong performance as measured by both real GDP and real GDP per capita.

 

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China gets a 40 year expansion relying heavily on commodities. Australia squeezes 30 years out of it by happily selling to the Chinese.

Australia has one of the biggest current account deficits relative to GDP in the world, even bigger than America’s.

China, which is a net exporter to the US, has a trade deficit with the world.

How oh how could it possibly have strong economic growth?

Didn't we kill the myth of mercantilism centuries ago?

Wrong. Australia is running a current account surplus.

https://www.abs.gov.au/ausstats/abs%40.nsf/mediareleasesbyCatalogue/1BC434D146B7F511CA257EB2001133A1?OpenDocument

Go to FRED:
https://fred.stlouisfed.org/graph/?g=p1Nu
Balance of payments BPM6: Current account Balance: Total: Total Balance as % of GDP for Australia (AUSB6BLTT02STSAQ)
Observation:
Q2 2019: 1.17854 (+ more)
Updated: Sep 11, 2019

Similarly, the Northern Great Plains parts of the United States have been booming in this century, for much the same reason as Australia: a high ratio of land to population means that locals can make a lot of money exporting resource-based products to China and the like.

I didn't know about this boom until studying Raj Chetty's 2015 analysis of where is best to raise your children, comparing parents' income in 1996-2000 to kids' income in 2011-2012. The #1 best county in America for working class families was Sioux County, Iowa (which is represented by Steve King). The other top 25 best counties for the American working class were similar: lightly populated places in the northern Great Plains or Great Basin with few immigrants.

Chinese have bought a lot of Australian real estate. And why do Chinese buy Australian (and Canadian, New Zealand, Singaporean?) Why not, oh, in Venezuela? There's a lot of countries to choose from and Australian real estate is not especially cheap.

A current account deficit is not a problem.
https://fredblog.stlouisfed.org/2017/02/demystifying-the-trade-balance/
"Is it bad to have a trade account deficit? If this means that your economy is booming and local production cannot keep up with demand, then no. If it implies that there is a current account deficit and, hence, foreigners are investing in your country, then also no. If this means that you can have more investment without having to save more, because the rest of the world is picking up the slack, no again. If you are worried that in the future dividends will flow abroad, then yes. But that will happen only if your economy is in good shape in the first place and will be able to afford paying such dividends."

Who has benefited from Australia's relatively high level of growth?

"Australia’s level of income is more unequal than the OECD average, but more equal than other major English-speaking countries including the United States and United Kingdom, which have very high levels of inequality. Australia’s Gini coefficient (an inequality measure where zero means complete equality and one means complete inequality) is 0.34, compared with an OECD average value of 0.3227."

"Key factors contributing to the rise in inequality from 2000 to 2008 include strong but unequal growth in wages and investment incomes, and a succession of income tax cuts in the mid-2000s which mostly benefited those on higher incomes."

"Wealth holdings are much more concentrated than income. The highest 20% of households by wealth own 62% of all wealth, while the lowest 50% own just 18%. The average wealth of a household in the highest 20% wealth group ($2.9 million) is five times that of the middle 20% ($570,000) and almost a hundred times that of the lowest 20% ($30,000). The wealthiest 5% had average wealth of $6 million and the wealth of the highest 1% averaged $14 million. Ownership of some asset classes is even more concentrated. The highest 20% of the wealth-holders own over 80% of all wealth in investment properties and shares and over 60% of all superannuation assets. In contrast, they own 54% of all wealth in family homes." https://www.acoss.org.au/inequality-in-australia-2018-html/

The trend in Australia is increasing levels of both income inequality and wealth inequality. Will this depress growth in Australia, as it has depressed growth in other countries with higher levels of inequality than in Australia? I should point out that the report I link does not take a position on this issue or on whether rising inequality is a good thing or a bad thing.

"The trend in Australia is increasing levels of both income inequality and wealth inequality."

The OECD gives Australia's income inequality Gini coefficient from 1995:

1995 0.31
2000 0.32
2004 0.32
2008 0.33
2010 0.34
2012 0.33
2014 0.34
2016 0.33
2018 ?

So a little rise in income inequality from 2000 but the trend has been flat since 2008.

What is the evidence that wealth inequality has gone up since 2000?

In order to get elected and remove the carbon price the Liberal Party effectively gave lower income Australians a significant tax cut in 2014. While one might think giving tax cuts to commoners is the way the game is played in a country with compulsory voting, it really seems to have pissed off the Liberals and I think a lot of their behaviour since then is explained by them trying to correct this "mistake". So I do think we are trending towards greater inequality, but only time will clearly tell.

What is unseen is important, there has been almost zero productivity growth since the early 2000's, the only thing that has kept the economy 'growing' has been mass migration and Reserve Bank 'stimulus'. The average person is no better off and like all countries where stimulus has been applied there has been a huge increase in asset prices. Home ownership was once achievable for the majority of young people, now it's simply not.
Why can't economists see these things? Is it because those who pay their salaries don't want to know? There is only one way to improve the lot of most people and that is productivity, increasing population without that only makes the economy larger but the average person is no better off, those at the bottom end are often worse off as low skilled migration drives down the wages of the low skilled native born.

I guess these are inconvenient truths.

Nothing you said is true.

Productivity has grown at an average rate of 1.7% a year for the last 12 years.

Inconvenient Lies is closer.

Lies , damned lies and statistics. I live here, any growth has gone to the top 5%, little has trickled down. The trouble with economists is that they tell the stories they like to hear.

Australia also has had the highest rate of immigration and the largest current account deficit relative to GDP in the Western world, or close to it, for the last 40 years. It’s a clear rebuttal to the nationalist school of economics.

Re: immigration volumes -> AUS

Its a Ponzi scheme to prevent or, at least mask, an economic downturn

Did I mention that the Australian Big 4 Banks are levered @ 60:1 in terms of capital: assets in mortgage lending?

Australia is a giant continent. Its cities are hardly crowded by European standards and there are huge swaths of the country with hardly anyone living in it at all. I'm not just talking about the arid outback but the pleasant southern temperate regions along the coast.

Would Adelaide really become an unlivable hellhole if its metropolitan population density doubled from 1,100 to 2,200 people per square mile?

No Adelaide would not become that. What would happen is that the tax drain on the rest of the country would increase, by a lot. South Australia, Northern Territory and Tasmania are just tax dollar drains. The nation would be better off if they were permitted to slowly waste away to their natural sizes. Until then SA will be given billions of dollars to make out of date submarines and other make work schemes.

If South Australia and Tasmania are tax drains on the rest of country, you'd mostly be referring to the old age pension and education. You can call for an end to the old age pension if you want, but it seems a bit rough to me.

These two states, especially Tasmania with its above national average fertility rate, feed newly educated young adults into Victoria and NSW. So if you are calling for children's education to be cut that's also a bit rough.

Love the way you imply that your ideas are mine, clever but dumb. The people who are having kids in Tassie are welfare sinks and their kids will be too. Please don't substitute your wet dreams for my statements.

A major reason why South Australia and Tasmania are tax drains as you call them is because the aged pension is a fixed amount but incomes in these states are below the national average. To stop them being tax drains it will be necessary to change this fact. Same for education. It follows from what you have written.

Australia is known for its low government debts among OECD countries and is running budget surplus this year. Private debt is among the highest in the world though.

The population of Australia is one order of magnitude less than the USA and the population density is the lowest in the world. Most of the population lives in densely populated urban areas with virtually unlimited room to expand. Australia's immigration policy is highly focused on the importation of highly skilled professionals:

https://web.archive.org/web/20100507054151/http://www.immi.gov.au/media/fact-sheets/20planning.htm

Australia has a zero tolerance policy towards "boat people", that many people consider inhumane, as per a recent post on this very blog. Australia also does not share a porous 2,000 mile border with a third world CONTINENT and is not being overrun by illiterate low-skill people with lots of kids in tow, none of whom speak English and are very expensive to educate and are heavy users of social services.

Large scale immigration from the third world may not make us richer, but it will divide us, as you can plainly see. But, "none are so blind as those that refuse to see".

Since the mid 1990's the Federal Gov has been importing huge (comparatively) numbers of low skilled migrants to give the appearance of a growing economy. Like the US the elites like this because it gives them cheap services and more restaurants. Unfortunately lots of the low income suburbs have become unliveable and dangerous. Many of these suburbs were settled by european migrants in the 1950's and 1960's, these older people are now leaving not because they want to but because it'sno longer home and too dangerous.

"Too dangerous"? Please provide a citation.

Let's just look at the period between 2010 and 2017. http://www.crimestats.aic.gov.au/facts_figures/1_victims/A1/

Robbery fell by around 40%.

Homicide fell 19%.

Unlawful entry with intent fell 24%.

Motor vehicle theft fell 15%.

The reported rate of sexual assault rose BUT that's primarily the result of more women feeling comfortable coming forward about their assault. It's not the result of Australian women suffering from more sexual assaults.

I think sfw watches TV. Shame shame shame Iraqi pedophile tank driver African gang immigrant.

See what I said to Cooper and apply it to yourself

Cooper, I'm a former police officer, home invasions and car jackings, store run throughs and lots of other crimes were once almost unknown in Victoria, now they are commonplace. That is a fact, the stats that vicpol put out are not factual, the systems and sampling are designed to avoid the truth. I'm assuming you're a high income well educated professional and as such I know you know little and understand less. You're part of the problem but will never see that.

You told us Australia's economic information is faked. Crime statistics are fake and, "The people who are having kids in Tassie are welfare sinks and their kids will be too." Clearly, Australia is a shithole country. Living in a crime ridden shithole where only the rich benefit from economic growth seems to suit me -- probably because I am a horrible person -- but are you going to move to another country where the people are nicer?

Strong economic performance in Australia is explained largely by demand for natural resources from China.

Those focusing in current account deficits are missing the point. While running a trade deficit negatively affects GDP all else equal, trade has positive economic effects outside of net flows of goods and services.

If, for example, someone makes good coin in the export business, he will buy goods and services that add to GDP. Someone has to mine the iron before shipping it to China.

Australian mining sector and US oil extraction industries are both around 7% of GDP. Or at least that's what the internet page on US oil tells me.

The Lucky Country. Shame about the mozzies.

Maybe we should become a Chinese colony, too, then.

Well, we are less of a US colony than we used to be. In fact, Australia has gone from giving support to the United States to giving it anti-support. By giving a photo op with Trump our PM is propping up a dickhead President, which is not the sort of think you do to a nation you regard as an ally.

And once again we pretend that tax policy is of no import to economics.

Australia has a relatively sane corporate taxation system:

- There are no state or municipal taxes on corporate income in Australia.

- Australia has among the lowest VAT's in the world at 10% and offers visitors a refund.

- Australia guards against double-taxation of dividends by providing franking credits for amounts of tax paid by the company. These are allocated to dividend and distribution payments.

- Australia is phasing in a reduction in corporate income tax rates for small business from the standard 30% down to 25%.

Overall, the Tax Foundation ranks Australia number 8 in the world on its tax competitiveness. https://taxfoundation.org/publications/international-tax-competitiveness-index/

It is a mistake to ignore the relevance of tax policy to economic health.

A lot of Australia's relatively superior economic performance must also be attributed to its history of tight funding and efficient use of higher education resources. Most recent figures show Australia still manages to succeed in keeping its PPP adjusted tertiary education spending per student below both OECD and EU averages thus achieving a significant comparative global advantage in percent of GDP not going to college and university waste. See table B.1.2 on page 171: https://www.oecd-ilibrary.org/education/education-at-a-glance-2017/indicator-b1-how-much-is-spent-per-student_eag-2017-16-en

Scale effect. Just increasing population from a low level causes gains from scale as intermediate warehousing and production become viable. The effect is tied to technology. Like, if you have enough people in San Francisco then a transcontinental railroad is profitable. Works up to a technology bound.

Good post. The "two quarters of negative Real GDP/person growth" definition is not just wrong, it's idiotic. For the US, the traditional definition (which is not correct, as you say) basically implied two quarters of less than negative 1% growth per capita. If you change one part of the definition, you need to start over and re-examine everything about the definition. (I prefer the unemployment rate as a measure of the business cycle.)

It is easy to have 28 years of uninterrupted growth when you have a country like China purchasing all your minerals, investing in your country, buying massive amounts of real estate, sending tens of thousands of students that pay full tuition price, etc.
Maybe the good people at the St. Louis Fed should take a closer look of why Australia grew over the last three decades.

You'd think the commodity boom and bust cycle would actually make it more difficult to have uninterrupted growth, wouldn't you?

For example in 2007/2008 the mining and sector contracted more than the rest of the economy, but we didn't suffer a recession until demand from China picked up, we suffered no recession because Australia was probably the only first world country that had a normal fiscal stimulus. Everyone fluffed it for reasons that are not entirely clear, or at least don't make sense.

Unfortunately, as a resource rich nation, Australia's GDP data is useless for this analysis. Mineral are wealth, and selling wealth is wrongly treated as income. At a minimum, we should look at NNI. https://link.medium.com/23Ju0Rzsq0

That would be Adjusted Net National Income. Which is still high as mining is only around 7% of GDP. But note the effect on the United States is similar when it is Adjusted NNI is used for it.

That's nice. But I'd like to know more about their emissions/ energy sources.

With the possible exception of a petro-state or two, Australia is second after the United States in net greenhouse gas emissions per capita. (It is even possible Australia is number one now.) This is for in country emissions. Emissions from oil and coal use are roughly equal. About 72% of electricity is generated from coal and around 8% each from gas, hydro, and wind. Most of the rest is solar. This is mostly on roofs but solar farms are growing.

Hmm. Maybe Naomi Klein is right.

In Australia the cost of cutting emissions is trivial. We have private companies wanting to close down coal power stations while the federal government is begging them / telling them not to. They seem to think if they can make Australia continue to burn coal other countries will as well and we'll be able to keep exporting it.

For more on this - Australian economist George Megalogenis has been arguing this for years - https://www.google.com/amp/s/amp.smh.com.au/entertainment/books/australias-second-chance-review-george-megalogenis-plea-for-more-people-20151223-glu9f0.html

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