Australian Economic Growth Forecast Down: Are We Really That Ignorant?

You can stop reading now.

Today’s Rum Rebellion was not written for you.

Today’s article is aimed at an audience that actually doesn’t read The Rum Rebellion.

Bit of a conundrum really.

But, contrary to popular opinion, I’m an optimist. And it’s this streak of positivity that makes me push on.

Hoping against hope that someone, somewhere knows someone in the establishment who just might be receptive to some basic logic.

Belief systems are powerful drivers. Challenging them is never easy.

But here goes.

The recent news of an IMF downgrade to our nation’s economic growth was met with sombre tones.

WARNING: Here’s two reasons why the AUD could collapse in 2020

Newsreaders. Current affair hosts. Economists. Financial commentators. Opposition politicians.

It’s as if this news came as an unexpected shock. Have they no comprehension of how past economic growth has been achieved and why, and that without a sustained bout of high inflation it’s mathematically impossible to continue?

Obviously not.

There was much ado over the fact that Greece — the one time economic basket — is going to achieve a growth rate superior to ours.

The inference is ‘if Greece can beat us, then that’s how bad it is here?’

The comparison makes for a great headline.

From The Sydney Morning Herald, 16 October 2019:

Australian economic growth tipped to be slower than Greece as signs show tax cuts haven't worked - 18-10-19

Source: The Sydney Morning Herald

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Here’s an extract from the article:

The IMF believes the Australian economy will grow by just 1.7 per cent this year, making it weaker than the economy of Greece, which has gone through several years of depression.

The statement is technically correct. The IMF forecast a 2% growth rate for Greece compared to our 1.7%.

However, (not surprisingly) it’s such a dumb and meaningless statement to make.

Why?

Australia’s Economic Growth rate shouldn’t be compared to Greece…

The first clue is in the extract…Greece has gone through several years of depression. Greece is recovering off a very low base. You’d expect there to be a bit of a kicker.

Here are the numbers:

The Rum Rebellion - Australias Economic Growth Rate compared to Greece

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The ‘worse than Greece’ story was picked up by most news outlets…or at least the ones I channel-surfed through.

This sort of useless reporting is a distraction from the real issue.

The audience that doesn’t read The Rum Rebellion is bogged down with ‘how can we get the economy growing above the 2% rate?’

All sorts of ‘cures’ for our economic ills are being put forward.

But what’s apparent in all the commentary is no one seems to really understand the root cause of the problem.

They appear to genuinely believe we have this miracle economy. Achieved with the guiding hand of the Reserve Bank and our industrious nature.

That’s partly true.

According to the Australian Government’s Productivity Commission, the theoretical way to make an economy grow is:

Economic growth, as measured by GDP, is jointly determined by the three Ps — changes in population, its rate of participation of the working aged in economic activities (also referred to as ‘labour utilisation’), and labour productivity.

More people working more productively is the key to genuine growth.

How have the three ‘Ps’ helped us since 1990?

More people? Tick. Our population has risen from 17 million to over 25 million.

Australian Population Growth - risen from 17 million to over 25 million - 18-10-19

Source: CEIC Data

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More labour force participation? Tick. The participation rate has increased from 63% to 66%.

The labour force participation rate has increased from 63% to 66% - 18-10-19

Source: CEIC Data

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More productivity per worker? Not so good. The trend is down.

Australias Economic Growth Rate - The Rum Rebellion - 18-10-19

Source: CEIC Data

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The big spikes in productivity in the 1990s were a result of investment in new technology. In recent years, productivity gains have been harder to come by.

Why?

When new machinery and/or technology is introduced into the workforce, there’s an initial lift in productivity. After that, any increases become marginal…even negligible.

Our economy has managed to remain recession-free for 28 years due to two factors:

Population growth.

And, the one that’s completely ignored by those who don’t read The Rum Rebellion:

Debt growth.

The combined effect has been…more people buying more things with more credit.

Thanks to the RBA’s guiding hand on the interest rate dial, our nation is awash with debt.

How much debt?

This is from the 3 October 2019 issue of The Rum Rebellion:

In September 1989, our nation’s total debt was $772 billion.

(On an inflation adjusted basis this would be $1,630 billion in today’s dollars).

Total Australian Credit (AUD Millions) - 18-10-19

Source: Australian Debt Clock

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Over the past three decades there’s been a ten-fold increase in debt…the latest snapshot shows debt at $7,981 billion and climbing.

Total Australian Credit - 18-10-19

Source: Australian Debt Clock

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Population growth only accounts for a fraction of this credit growth.

In 1989 our population was just shy of 17 million. Today it’s slightly over 25 million…a 50 percent increase.

When you do the inflation and population adjustments, the 1989 debt figure would be around $2,500 billion today.

Where did the other $5,481 billion come from? A combination of lower interest rates and lower lending standards.

We’ve become hooked on growth. Population growth. Wage growth. Portfolio growth. Property growth. Economic growth. Profit growth.

In these modern times, the Productivity Commission’s formula for economic growth should include a fourth ‘P’.

Profligacy.

Which is defined by the Merriam-Webster Dictionary as being:

…wildly extravagant and usually grossly self-indulgent expenditure.

Our historic recession-free run has been a complete sham.

The GDP number is a quantity only reading.

Every single borrowed dollar — irrespective of what it’s spent on — is recorded as a dollar of economic activity.

Our economic growth model is a debt junkie…

More people borrowing more dollars to spend on items of self-indulgence is hardly the stuff of a strong economy.

Australia’s economy has been built on the quicksand of property investment overreach and excessive consumerism.

We have a debt load of $8,000 billion being supported by an economy of (in Australian dollars) $1,800 billion.

The debt albatross around our neck is why the economy is slowing. But no one in mainstream commentary mentions it. It’s like it doesn’t exist or is somehow not connected to the problem.

Wake up. IT IS THE PROBLEM.

We’ve reached the sad and sorry state where we now need $4.40 of debt to generate $1 of GDP.

For that one person in mainstream commentary that’s still reading this, here’s the equation for a return to a growth rate that’s at least equal to Greece’s.

$1,800 billion x 2% = $36 billion.

With me so far?

Good.

It takes $4.40 of debt to generate $1 of GDP.

Therefore, we multiply $36 billion by 4.4…

To continue on the 2% growth path, we need to borrow an additional $160 billion. And this exercise has to be repeated every single year…from here to eternity.

And that’s where we are running into problems.

Our household sector is already one of the most indebted in the world.

How much more capacity — even with the lowest rates in history — is there left for people to borrow?

A bit. But not as much as previously.

Why?

As reported by Yahoo Finance on 16 October 2019 (emphasis is mine):

Speaking at Yahoo Finance’s All Markets Summit in Sydney, [Peter] Costello said Australia’s low productivity growth has been a problem for more than a decade, mirroring similar growth around the world. And this low growth is leading to stagnating wage growth.

Households — faced with rising power bills; school fees; childcare expenses — are feeling the pinch. Without wage growth, borrowing more money is something they are thinking long and hard about.

A compounding problem

Surely someone in mainstream has heard of compounding money.

Achieving 2% (or higher) growth every year on an ever-increasing base becomes more difficult to achieve.

Greece’s growth rate of 2% requires a per capita increase of only US$440. For us to match that, we need nearly US$1,000 per capita.

The compounding effect of growth makes it that much harder to replicate previous numbers.

And if those numbers have been achieved by an even faster compounding rate of debt, then you are bound to hit the wall at some point.

With households running out of capacity to take on more and more debt, that wall is getting much closer.

Which is why we’re hearing the calls for Government to abandon the pursuit of its surplus.

If the private sector can’t or won’t borrow to the extent needed to keep growth rates positive, then, based on Keynesian economics, the public sector must.

The squandering of future tax dollars on present day projects is precisely what Rudd and Swan did during the GFC.

And, we are still paying for this inept duo’s profligacy.

The relentless pursuit of growth is entering an endgame.

The reason growth is slowing is simple. People are reaching the point of debt fatigue.

It beggars belief that people — ones who profess to know better — are ignorant to the real driver of our so-called economic success.

We are a nation of borrowers.

We’ve reached the point where nothing can be done to save us from a homegrown debt crisis. The debt is baked into our economic cake.

When the proverbial does hit the fan and our GDP number goes negative for a few quarters, you can be assured the Government will abandon its position on maintaining surpluses.

Public sector debt will go through the roof.

Why?

Because Australia’s economic growth model is a debt junkie.

That’s the harsh truth mainstream media will not be reporting to you anytime soon.

And that’s why the public at large remain totally ignorant of the direct connection between our nation’s debt level and our miracle economy.

Regards,

Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: HOODWINKED! Why Australia’s ‘miracle’ economy is a farce. Download your free report now and find out why.


Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia. In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback. In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry. In 2013, he joined Port Phillip Publishing as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter. Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors. His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.


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