There’s a lot of hoo-ha about Australia being in an income recession and that 2017 will be worse than 2016. What’s worse is that someone like the great Harold Mitchell — the media-buying guru — has jumped on this bandwagon.
He wrote a great piece in the Fairfax press today but I don’t agree with all of it.
I dealt with this income recession story a few months ago, when a bunch of economic terrorists started taking pot shots at me on Twitter. Why does Twitter bring out the worst in powerless, angry ‘experts’?
Sure I get it that some economy watchers can’t accept that our economy is growing at around 3% for the year to March and then the year to June.
The 3% number is a sign that our economy is doing OK. If it goes over 3%, history says it’s good for unemployment. The jobless rate is 5.8% and the Budget tips it goes to 5.5% and not too many economists argue with that so long as we keep growing around current rates or we do better.
And this is why I worry about Harold Mitchell and his economist, “Charlie”, who pedaled his “income recession” argument to my old mate.
In statistical terms, Charlie is right. Basically, this newly-loved term by natural-born pessimists — call them economists of a certain leaning — says Gross National Income has gone backwards at least for two successive quarters.
In contrast, a real recession is historically defined as two successive quarters of negative GDP growth. This looks at what we’re producing, which has been seen as a better guide to the future of jobs, while an income recession looks at what we’re earning out of doing this producing of goods and services.
In theory, income comes from producing so economists have measured what an economy does in three ways: the production method, the income method and the expenditure method. It was assumed they produce the same result, give or take a bit of statistical manipulation for the real world.
Well, it looks like the real world differences, as measured by statistics (Real GDP versus Real Gross National Income) are giving us different stories.
I thought the best measure of how households are actually going (income-wise) was to look at a statistical creation called Disposable Personal Income. This measure not only takes into account the income we receive but adjusts it for other things, such as tax cuts, government payments and it should even pick up that many households are reducing their personal inflation rates by shopping online!
I threw this controversy to two pretty good economists — AMP’s Shane Oliver and CommSec’s Craig James — who both quickly agreed. They seemed equally peeved about this income recession talk.
Craig sent me this chart to back up his argument:
What you see is that households have actually had rising personal disposable income, so it’s not as bad as the income recession story implies.
This is what Shane Oliver had to say about this economic tiff: “Talk of an income recession based on Real Gross National Income being down 1.3% over the last year is way over the top. The main driver of the slump in real GNI is the slump in commodity prices, iron ore, coal etc. And this does affect the economy overall but only parts of it (e.g. miners, revenue growth in Canberra etc.). Most Australians do not get paid in iron ore or coal so their slump is off less relevance. I would agree that DPI is a better guide for most Australians and real growth in it is still positive, albeit modest.”
And he threw this in as well: “I think all the current nonsense about an income recession is a bit like five years ago when iron ore was $US180/tonne and some were saying we were booming because national income was through the roof. Try telling that to someone in Blacktown or Avalon at the time and they would have laughed at you!”
Harold’s headline was spot on: “Australia is stuck in a rut and needs new, brave leaders.”
And his sub-editor did a good job pointing to his story with: “Australia needs confidence not cringe to move forward.”
There is a confidence issue and we saw it this week. Business confidence had been bad until Malcolm showed up and it has bounced back but consumer confidence is just into positive territory. That said, it has been struggling.
Our national leadership hasn’t helped. From Rudd to Gillard to Rudd to Abbott to Turnbull, it hasn’t been a confidence-boosting experience.
But if you add this to GFC-talk, the threat of the Internet with the likes of Uber and AirBnB, the rise and rise of the likes of Aldi, Amazon and Google and you can see why workers in the taxi, hotel, retail and media industry might not seem confident.
It sensibly explains why those with mortgages have historically high buffers, where they have been paying down more on their mortgages rather than going out and spending. And anyway, if they did, they could be creating jobs and giving their income to workers in another country rather than here.
It doesn’t help that China is growing more slowly and it probably doesn’t help that we trust them with our important power grid or our cattle stations. So right now, understandably, we’re treating our best export customer like an enemy!
Harold is right, we do need brave leadership but we also need a great communicator: someone who’ll show us how the future will pan out and how we’ll get growing again with income growth. Somehow, our political parties — both big ones — have to get out of the old world to create jobs for themselves in a future parliament to show us how we create jobs for others in a scarily changing world.
Sure, brave leaders are needed but they will have to create brave, confident Aussies who’ll be prepared to spend, create jobs and income.
This is a huge task but if we can take anything from the first week in Rio, we Aussies can be world-beaters. It always comes home to me when I see our athletes’ medal tally and we’re up their with the US, China and the other huge countries of the world.
We could kill the economic threats out there but the starting point is that our national leaders must beat the confidence recession first. They must instill positivity as a starting point, which might be hard to stomach for a lot of my media buddies out there.
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