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Many people read or hear the headline figure of GDP growth each quarter from the ABS[1], and think, “so what?”
However, investors are less interested in the headline figure than a range of sub-measures that provide insight into both future expectations and existing conditions.
There is merit in being reminded of two insights we consider relevant to Australian equity markets in the future: GPD per capita and business investment.
1. GDP per capita fell
The governments of Canada and New Zealand have also chosen population growth as the driver of economic expansion. While both Canada and Australia are expanding overall, they are collapsing in per capita terms.
Of interest, economies that have contracted overall recently, including Japan and Germany, both have still delivered better per capita outcomes than Australia.
Comparing GDP growth (red) and GDP per capita growth (grey)
The Australian GDP growth further slowed to 1.1% in the year to the end of March. But this was significantly below the population growth of 2.4% over the same period.
It logically follows that GDP per capita fell. This is a continuation of Australia’s ‘per capita recession’, with the metric declining for a fifth consecutive quarter. It’s a challenging economic environment.
Per capita recession continues – significantly below pre-covid trend
Why is a GDP per capita recession a problem?
According to the OECD, GDP per capita is a broad measure of “average living standards or economic well-being.” A GDP per capita recession is, therefore, an extended period of declining living standards.
Also, GDP fails to directly measure a range of non-economic costs created by population growth that exceed economic growth, including weak wage growth and congestion. So, arguably a per capita recession feels worse than the numbers suggest.
The impact of a per capita recession can be worse still, depending on the drivers of the fall. If a country is producing less GDP per capita, it will be the result of either fewer hours being worked or the hours worked being less productive. A classic demand-based recession like 1991 saw hours worked fall, driving a per capita recession.
In 2024, the per capita recession is an issue of productivity collapsing, not demand.
Productivity can sometimes be seen as quite an esoteric issue, labour market reform, industry reform, policy impact … eyes glazing over stuff. However, as US Justice Potter Stewart said of obscenity in 1964, “I know it when I see it”.
Today’s Australian economy is less productive than it was pre-covid, and we see it in everyday life, from Uber Eats to work-from-home. We are doing very little to address it.
2. Companies no longer investing, so…
The blip in business investment in 2022-3 has been reversed, returning to the average negative contribution to growth of the last decade.
This level of business investment is historically weak and barely consistent with population growth, let alone large enough to expand the economy’s capacity. The chart below shows the sharp retracement of net business investment since 2012 to levels not seen in the previous 50 years. The surge in mining investment in the early 2010s masked overall underinvestment, but mining investment is now also remarkably stagnant.
Imagine a country such as Australia now even underinvesting in mining!
Net business investment as % of GDP: falling for 65 years
Source: Minack Advisors
With business no longer consistently investing, all of the work is now in the hands of the government.
The chart below shows that business investment retraced in 2015 the gap has partly, only partly, been refilled by government investment, predominantly at the state level.
Government investment takes up the private investment gap
Source: Minack Advisors
Of note is that the government’s investment is partly a catch-up to the infrastructure underinvestment required for the previous decades of population growth. Despite the scale of the increase, it has done very little to address the non-economic costs of rapid population growth
Why is a GDP per capita recession a problem?
Businesses not investing ultimately create a productivity problem. Without continual investment in new technology and capacity, new plant and equipment, and IT hardware and software solutions, there is limited capacity to drive higher output for the same level of hours worked.
The effects are not felt straight away, however; in fact, long-term costs of the previous decade’s over-investment in existing housing are being felt by today weaker production. Without productivity, we are again forced to rely on population-led economic growth, which in turn creates weaker productivity.
Conclusion
This is a treadmill that is hard to jump from and one that requires active thought for investors, not to mention governments.
For example, buying an index fund that hopes to grow with the economy isn’t straightforward in an economy with productivity challenges.
The ‘below-the-fold’ data in the March quarter National Accounts reinforced our view that we need to be selective in our equity exposure. As should all investors.
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[1] The Australian Bureau of Statistics publishes a document each quarter called the National Accounts. GDP growth is but one of a myriad of data it contains.
The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation, or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.