Australia’s economy grew by 0.6% over the three months to June this year, and by 1.8% over the year to June. This outcome was better than expected by most economists and, if you’re a glass half-full type of person, you would have been happy to see that the economy has picked up its pace from a very lacklustre performance in 2024.
However, while we economists may be very excited to dig down into the “national accounts” stats on such thrilling concepts as per capita gross domestic product (GDP), the implicit price deflators and fixed capital formation, you may well be asking yourself what on earth does any of this have to do with me?
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Well, quite a lot, as it happens. These figures not only tell us how well, or otherwise, we are doing as a nation, they also point to the quality of that growth. Are we growing just because there are more people buying more Labubus? Or are we creating greater national worth for each of us (as measured by per capita GDP) because more of us are being more productive?
When growth is purely population-driven, it’s like an empty sugar hit from a soft drink. We use up precious resources without making anyone better off.
The latest figures tell us that the economy may be growing, and at a faster pace in nearly two years, but that is largely because population growth means more people are buying stuff. Put another way, the economic pie is growing, but so too is the number of people who need to share it. Our living standards, as measured by per capita GDP, did creep up a teeny bit in the June quarter, but we are still worse off on this measure than we were in June 2022.
There will be some people who will tell you that no growth is in fact the best thing for our planet. There’s no doubt that it would be far better if statisticians could incorporate measures such as environmental health, carbon pollution and wellbeing into our economic report cards. But it is naive to think that zero growth wouldn’t have dire consequences, particularly for the most vulnerable in our society who rely on government spending. When the economy stands still, or even shrinks, so do government coffers and their ability to fund support programs and infrastructure.
You can see how economists have a way of turning good news into bad – no wonder economics is known as the dismal science.
But back to this week’s news. The national accounts also give us the valuable information on how our economy is shaping up in response to international and domestic trends. This, in turn, has potentially important ramifications for monetary policy, that is, how the Reserve Bank of Australia sets interest rates. And, let’s face it, we are all pretty obsessed with interest rates these days.
In the case of international trends, Donald Trump’s tariffs haven’t marred our export performance, at least for the moment. And in the case of domestic trends, the RBA’s first two interest rate cuts in this cycle have seen households more willing to open their wallets than they have been for a long time. With more recent data showing that consumers are becoming less pessimistic, if not yet optimistic, the RBA will be watching this space closely. Should consumers lift spending too rapidly in coming months, this could put upward pressure on prices, limiting the potential for further interest rate cuts. You can see how economists have a way of turning good news into bad – no wonder economics is known as the dismal science.
Over the past year or so, the government has been the main driver of economic activity. Indeed, Australia would have been in a recession last year had the government not jumped in to support the economy with a wide range of additional spending measures including on health, energy supports, and childcare. However, that level of spending was never going to be sustainable, and we are now seeing state and federal governments investing less in major projects as well as pulling back on their regular spending.
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But we need more business investment, not just consumer spending, to really lift our longer-term living standards. When measured as a share of the overall economy, business investment accounts for a little less than 12%, and it has been inching lower over the past 18 months. Back in 2012, that figure was 30% higher. Not exactly a recipe for the productivity and “growth mindset” that the government warns we desperately need, but at least the latest figures show productivity moving in the right direction.
Overall, I would give Australia’s latest economic report card a score of B-. It tells us that spending is shifting from the public to the private sector, which is good news but, even as growth picks up, we are falling short on business investment and productivity growth. We certainly warrant an “improved performance” stamp on the card, but we are still a good way off from “excellent”.