Quarterly national accounts reporting usually focusses on gross domestic product (GDP) and its main components. This currently paints a very misleading, excessively optimistic, picture of Australia's capacity to support increased living standards. Falling terms of trade are the reason.
Largely ignored by the commentariat, the Australian Bureau of Statistics (ABS) produces other estimates that allow for this terms of trade effect.
First, it's useful to look at ABS estimates of Australia's real gross domestic income. This measure adjusts the ABS real GDP estimate for changes in our terms of trade. Falling terms of trade reduce Australia's real purchasing power and, for income, are a subtraction from real GDP growth.
In trend terms, real gross domestic income increased by just 0.2% in the June quarter, the same as the estimate for the March quarter. The increase in the year to the June quarter was just 1.9%. The corresponding real GDP increases were 0.8%, 0.9%, and 3.8%, respectively. The difference reflects falls in the terms of trade by 2.9%, 3.6%, and 10.5%, respectively. The terms of trade have fallen in each of the last four quarters.
This shows that growth in Australia's purchasing power from real GDP is only a fraction of real GDP growth. Over the last six months, it has been about one-quarter, or less, of the estimated growth in GDP. In the year to the June quarter, it has been about half the real GDP growth estimate. The gap has widened faster in the second half of 2011-12.
Second, there's a broader measure of changes in Australia's economic well-being: real net national disposable income. This measure adjusts the ABS real GDP estimate for: changes in our terms of trade, real net incomes from overseas, and consumption of fixed capital (roughly, physical depreciation, and normal obsolescence and accidental damage for fixed assets).
In trend terms, real net national disposable income also increased by just 0.2% in the June quarter and in the March quarter. The increase in the year to the June quarter was just 2.3%. Measured in per capita terms, the corresponding changes were declines of 0.1% in the June quarter and the March quarter, and an increase of only 0.9% in the year to the June quarter of 2012 (all of this increase occurred in the September quarter of 2011).
In per capita terms, the last six months have seen falling real net national disposable income, despite growing real GDP. Over the year to the June quarter, the growth in per capita real net national disposable income was less than one quarter of the growth in real GDP of 3.8%.
There has been little or no official comment about these terms of trade adjusted growth estimates.
The June quarter accounts show some productivity growth and rising real unit labour costs.
In trend terms, the hours worked index has been falling for the last six months, and currently sits at the level recorded for the September quarter last year. Hours worked in the market sector have also declined. GDP per hour worked increased by 0.9% in the June quarter and 3.5% in the year to the June quarter. Real unit labour costs increased by 1% in the June quarter and 2.3% in the year to the June quarter.
Further large terms of trade declines are likely, even if high food prices (perhaps countered by drought-affected volumes) continue. The decline might be even larger in the September quarter. If real GDP also slows more, it is conceivable that real gross domestic income might fall.
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