Peter Swan

According to the Australian Labor Government quick action to instigate Keynesian pump priming stimulus policies saved the Australian economy from the ravages of the Global Financial Crisis (GFC). In the March Quarter 2008, GDP per Capita stood at $14,651 and fell to only $14,462 in June Quarter 2009, a fall of only 1.28%. A remarkably good result for what was billed as the worst global crisis since the Great Depression. The Keating “recession we had to have” was far more severe with a fall of 3.1%.

The real story is rather different and in order to focus on the impact on Australians I report only per capita series from the Australian Bureau of Statistics (ABS). Per Capita Net National Disposable Income in real terms fell from $12,161 in the September Quarter 2008 to $11,387 a year later in the September Quarter 2009. This was a massive real deterioration in living standards of 6.4%. Australians suffered more during the GFC than for many decades.

What accounts for the divergence between these GDP and Income measures with an approximate 500% difference? In a recent issue of the Australian Economic Review, Alan Hall points out that due to a measurement inconsistency, the ABS (and other agencies) excludes the change in the terms of trade from the GDP estimates. That is, the real GDP accounts reflect values (or should reflect values) and not physical volumes.

Thus, production computed from the GDP accounts fails to equate with real incomes and expenditures because the ABS neglects the real purchasing power gain in exports relative to the price of imports (i.e., the terms of trade).

If the price of our exports doubles or import prices halve, a dollar of exports purchases twice as much. This improves our income, production, and productivity. To pretend that terms of trade changes in the real production economy are not happening is to behave like an ostrich. Having one’s head in the sand is perilous to our continued prosperity.

In the June 2008 Quarter Australia experienced a massive 15.9% improvement in the terms of trade followed by a deterioration of 13% from December Quarter 2008 to September Quarter 2009 during the GFC that contributed the most to loss in income. It is far from clear how ‘Pink Bats’ and other stimulus measures counteracted this GFC induced deterioration in the terms of trade.

It is certainly convenient for the Treasurer, Mr Swan, (no relative) that he can paper over the GFC period using misconceived GDP figures. These mistakenly attempt to measure real production changes while ignoring the relevant price changes. The resulting charge laid against the Gillard Government and its predecessors of destroying productivity growth is unfair. Dean Parham, The Australian, April 20, finds that productivity growth has disappeared in recent years, if not become negative.

The displayed Figure showing growth rates in Per Capita GDP and Income from March Quarter 2004 to the December Quarter 2011 reveals the true story. Consistent with Parham’s story of productivity failure, Per capita GDP has stagnated with almost zero growth over this period (actually about 1%) while true productivity growth as reflected in the per capita income numbers has hardly missed a beat, with the exception of the GFC period.

The overall growth rate in per capita disposable income is 2.35% over this period, comparable with the 1990s even after taking into account the GFC. This higher income and productivity growth once again reflects better terms of trade that have improved by a massive 34.1% since the September 2009 Quarter.

In fact, Parham (p.10 of the Productivity Commission Report) recognises that his pessimistic score card is largely driven by productivity improvements: “to the extent that the favourable shift in the terms of trade has brought about a productivity decline (especially via mining), that decline does not bring the usual concern in terms of its effect on the prosperity of Australians.”

Once these sustained terms of trade improvements cease, it is only then that we will find out if Parham’s “productivity-sapping regulations” have been allowed to take hold. In the meantime, the ABS needs to report a more honest and transparent set of GDP accounts in the in time to inform the forthcoming post-Budget debate.

Peter Swan is a professor of finance at the Australian School of Business, University of NSW.

This article first appeared in The Australian 7 May 2012.