Australia's Economic Recession: Analysis of GDP and Key Factors

This report analyzes the economic recession in Australia, focusing on the decline in GDP per capita during the fourth quarter of 2018 and its implications. The analysis highlights a slowdown in economic growth, falling household spending, and a mismatch between consumer spending and household income. Government spending, particularly on infrastructure and healthcare, is identified as a key contributor to growth, offsetting weaknesses in the private sector. The report also examines the impact of weak wage growth, low wage expectations, and falling house prices on consumer behavior. Data from sources like the Australian Bureau of Statistics (ABS) and ANZ are used to illustrate trends in GDP, household income, and savings, providing insights into the challenges facing the Australian economy and the potential pressures on the Reserve Bank to cut interest rates. The report discusses the relationship between consumer spending, household income, and the impact of credit tightening on the economy.

5/14/2019 Australia's economy just entered recession on a per capita basis - ABC News (Australian Broadcasting Corporation)
https://www.abc.net.au/news/2019-03-06/gdp-q4-2018/10874592 1/3
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Key points:
Australia's economy slowed from 4pc
annualised growth at the start of 2018,
to around 1pc in the second half
Growth of 2.3pc over 2018 is well
below RBA forecasts and places more
pressure on the bank to cut rates
Australia's economic output shrank
0.2pc per person in the fourth quarter,
after a 0.1pc decline in the third
Australia's economy just entered recession on a
capita basis
By business reporter Stephen Letts
Updated Wed 6 Mar 2019, 6:41pm
PHOTO: Australia's economy hit the brakes in the second half of 2018 with annualised growth of 1pc.(REUTERS/Thomas White)
Australia has just recorded its second straight quarter where the
economy shrank on a per capita basis.
Removing the impact of population growth from fourth quarter GDP
figures, the economy declined by 0.2 per cent in the three months to the
end of the year, following a 0.1 per cent decline in the three months to
September.
Including population growth does not make the picture much rosier, with
the economy growing at just 0.2 per cent over the fourth quarter.
The weak result dragged down Australia's economic growth last year to
2.3 per cent, well below the Reserve Bank's optimistic call of 2.8 per cent
and beneath even the more pessimistic analyst forecasts.
It also shows a dramatic slowdown over the course of last year, with
annualised growth over the second half of the year coming in at 1 per cent,
compared with the brisk 4 per cent in the opening months.

5/14/2019 Australia's economy just entered recession on a per capita basis - ABC News (Australian Broadcasting Corporation)
https://www.abc.net.au/news/2019-03-06/gdp-q4-2018/10874592 2/3
EMBED: GDP per capita
"Growth in the economy was subdued, reflecting soft household spending and a decline in dwelling investment," ABS
chief economist Bruce Hockman said.
"The approvals for dwelling construction indicate that the decline in dwelling
investment will continue."
Treasurer Josh Frydenberg said the fundamentals of the economy remained strong despite the impact of falling
consumption spending and the drought.
"It was a challenging year in halves when it comes to growth — strong quarters in March and June and slower than that
in September and December," Mr Frydenberg said.
Government spending covers weak private sector
The domestic sector continues to struggle, with consumption up a weak 0.4 per cent over the quarter, while private sector
investment and demand effectively contributed nothing to GDP growth, compared with the 0.4 percentage points they
added over the previous four quarters.
The biggest contributor to growth was government spending.
"Public investment remained at high levels with state and local government growth of 6.3 per cent reflecting continued
work on a number of large infrastructure projects," Mr Hockman said.
"Government final consumption expenditure grew 1.8 per cent, with ongoing
expenditure in health, aged care and disability services.
"This investment translates to ongoing strength from the healthcare industry, which remains the largest contributor to
economic growth."
Household spending and income 'mismatch'
ANZ's Felicity Emmett said the figures were disappointing, particularly the ongoing weakness in the household sector,
where vehicle sales, household goods and utilities spending were the main drags.
"The motor vehicles and household goods are probably related to credit tightening and perhaps an impact of the wealth
effect," Ms Emmett told ABC News Channel.
Source: Thomson Reuters Datastream, ABS, ABC News
Gross Domestic Product Per Capita
% change, quarter-on-quarter
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
GDP PER CAPITA

5/14/2019 Australia's economy just entered recession on a per capita basis - ABC News (Australian Broadcasting Corporation)
https://www.abc.net.au/news/2019-03-06/gdp-q4-2018/10874592 3/3
"When we drill down to look at household's experience, you can see that things like
wages and household income growth is still very low."
Ms Emmett said there was a big mismatch with consumer spending still outpacing household income growth.
"So consumers are still assuming that their household income will pick up to match consumption spending," she added.
"I think in this new world of ongoing low wage growth, that is actually, perhaps, an unreasonable assumption."
This is a topic that Reserve Bank governor Philip Lowe addressed in a speech on Wednesday morning, arguing that
weak pay growth and low wage expectations were a bigger long-term threat to consumer spending than falling house
prices.
The change in consumer habits is reflected in slight uptick in the income-to-savings ratio, which in turn points to a more
conservative approach to spending developing.
Citi's Paul Brennan said the rise in savings is consistent the negative wealth effect from falling house prices, while the
weakness of consumer spending reflects poor income growth.
"Although nominal [non-inflation adjusted] GDP is growing strongly … the share going to employees has declined in
contrast to a rising profit share," Mr Brennan wrote.
"Additionally, household income available for consumption has been further
squeezed by payments growing faster than income."
EMBED: Household incomes vs savings
Topics: business-economics-and-finance, money-and-monetary-policy, australia
First posted Wed 6 Mar 2019, 6:06am
Source: Thomson Reuters Datastream, ABS, ABC News
Household disposable incomes fall as wages flatline
Seasonally Adjusted YoY % change
2006 2008 2010 2012 2014 2016 2018 -2%
0%
2%
4%
6%
8%
10%
12%
14%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
2.5
0.9
2.0
INCOME - SAVING RATIO COMPENSATION OF EMPLOYEES
GROSS DISPOSABLE HOUSEHOLD INCOME