Don’t get too excited by Australia’s rebounding economy – it’s a distorted snapshot of the true picture | Greg Jericho

The Australian economy at the end of 2021 rebounded for one reason alone – people coming out of lockdowns in the late winter and spring period spent their money. But ironically this massive surge of growth from households comes at a time when workers are receiving a smaller share of the economy than ever before.

During the global financial crisis, then Treasury secretary Ken Henry famously advised the Rudd government that the best way to drive the recovery was “go early, go hard, go households”. The reason being that household spending makes up just over half of Australia’s economy and if people are spending money, then the economy will do well.

The latest GDP figures for the December quarter of last year are not a case of government stimulus to households powering growth, but instead one where household spending delivered a major boon to the economy because people in New South Wales, Victoria and the ACT were able to come out of lockdown and once again spend money.

In the December quarter, Australia’s economy grew by an equal record 3.4%.

But don’t get too excited about the record – it only occurred because in the September quarter last year the economy shrank by the third-biggest amount ever:

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And essentially all of this record growth came from household spending:

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The other biggest generator of growth besides our spending was that of the “change in inventories” which occurred because businesses built up their inventories (in order to makes things for and sell things to households).

And what did we increase our spending on? Overwhelming nonnecessities – recreation and culture, clothing and eating out:

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But this is decidedly a case where just looking at one quarter hides how big the damage of the pandemic has been.

Despite the strong pick-up, household spending in cafes, restaurants and the like in the last three months of 2021 was still 14% below that in the same period in 2019. The use of transport services meanwhile remains 74% below the pre-Covid period:

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The boost in the economy also did not come from across the nation – it really was just driven by NSW, Victoria and the ACT. These states and territory had been in lockdown in the September quarter, and so, not surprisingly, saw a massive jump in activity after the restrictions were removed:

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These rather absurd quarterly growth figures mean focusing on three-month periods can exaggerate for good or ill what is going on.

If we instead look at the amount of economic activity over the course of 12 months, we are able to see much more clearly the impact of the pandemic and our recovery:

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In the first three months of last year, Australia’s annual activity was some 4.6% below the median-term trend. Essentially our economy was $95bn smaller than expected.

Now we are 2.1% behind the trend pace, suggesting that, all going well, by the end of this year we should be back to where we were expected to be prior to the pandemic.

That would be an astonishing recovery, but one thing that currently is not assisting things is government support.

The end of the homebuilder program after the initial hit from the instant-asset write-off saw dwelling construction and investment in machinery and equipment decline in the last quarter of 2021:

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While the instant-asset write-off did produce a big jump in the investment in machinery and equipment, the reality is there are only so many utes and tools small businesses can buy. That hit last year may now be followed by an ongoing slump in such investment.

What we also can see is that the government spending and investment is no longer providing stimulus to the economy:

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Government spending was essentially flat, while public investment fell. The problem is so too did private sector investment.

Given government stimulus bolstered our economy during the pandemic, its withdrawal now will inevitably hinder the economy. That would be fine if the private sector was ready to take over, but at this stage it appears not.

One thing businesses can’t blame is labour costs.

In the last three months of 2021, real non-farm labour costs fell 0.2% and they are now 3% below what they were prior to the pandemic.

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This mean that as we now pass through the end of the pandemic lockdowns we find that the share of the economic pie going to workers is smaller than ever.

In the December quarter just 46% of GDP went to the compensation of employees – 1.5 percentage points lower than it was two years earlier and lower than at any time in recorded history.

Households are driving economic growth, but workers are not getting their fair share of rewards.

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