When you get right down to the fundamentals, the economy is looking pretty crook | Greg Jericho

Despite the government’s incessant upbeat predictions, the overall figures are not very healthy at all

Ahead of the latest GDP figures to be released on Wednesday has come a range of economic data suggesting that from sales to investment to productivity the fundamentals of the economy are in a pretty bad state of affairs.

When faced with weak economic growth, the government’s response has been to argue about “the fundamentals” and use the words of the governor of the RBA in July that they “are strong”.

The prime minister suggested three times in September that the fundamentals are strong. The treasurer, Josh Frydenberg, has watered it down a little of late, telling Ross Greenwood on Melbourne Cup day that “the fundamentals of the economy are sound” and Steve Price on 20 November that the fundamentals are “in a pretty good place”.

All in all you would think things are going along swimmingly.

So let’s have a look at some of the fundamentals.

On Monday the latest Commonwealth Bank manufacturing purchases managers index (PMI) was released showing the index fell from 50.0 in October to 49.9 – the first time in the past three years it has fallen below 50.

This came off the back of the latest private new capital expenditure figures released by the bureau of statistics late last week which revealed that for the first time in three and half years the volume of investment in the non-mining sector was below what it was a year earlier:

While the long slump of mining investment looks to be over, the non-mining sector has started to go backwards – down 4.2% over the past nine months.

Even worse, the latest estimate for non-mining investment for this current financial year is below what was expected for 2018-19:

This does not bode well because not only does capital investment lead to stronger employment, it is also crucial for improving productivity – the most fundamental of all the fundamentals!

And right now we are suffering a productivity crisis.

Productivity is a hard thing to actually measure, especially at the industry level. The ABS each year releases its experimental estimates of productivity with a focus on not just labour productivity but productivity that adjusts for the quality of hours worked. This takes into account the improved skills and education of the workers.

The figures also measure what is known as “multi-factor productivity” (MFP), which attempts to measure how well labour uses increased capital spending.

And the news is not good. In 2018-19 for the first time in eight years MFP fell and for the first time in nine years labour productivity fell when accounting for changes in labour quality. When measured merely on an hours-worked basis, 2018-19 marked the first time labour productivity fell in a financial year:

A big reason is the drought – agricultural productivity plunged 10% off the back of a 10.4% drop in output.

But it is not just the fault of the drought. Eight of the 16 market sectors industries saw productivity falls of more than 1%, and just four saw growth above that level:

The result in the construction industry is most concerning given productivity has fallen by an average of 4.3% over the past three years. Such a result suggests the government’s reintroduction of the ABCC in 2016 has been an abject failure at improving productivity in the sector.

The construction sector also saw a 3.4% fall in output in 2018-19, a situation which is unlikely to be improved soon given the latest building approvals figures released on Monday.

For the 23rd month in a row (just one month shy of tying the record set during the 1990s recession), the total number of private sector building approvals fell in October:

For 20 consecutive months the number of building approvals for private sector houses has fallen. In October just 8,126 private houses were approved (in trend terms). That is the lowest figure in any month since April 2013.

As AMP’s chief economist, Diana Mousina, notes, this does not bode well for any improvement soon in dwelling investment.

She argues that “the September quarter GDP data is expected to show a further fall in housing construction”. AMP also expects “residential construction will remain a drag on the economy until mid-2020”.

The latest sales figures released on Monday also continued the bad news with retail sales income down not only in volume but astonishingly also in current dollar terms:

The shadow treasurer, Jim Chalmers, argued the figures are yet more of a sign of the government’s weak economic management: “This comes on top of weak growth, stagnant wages, rising unemployment, record high household debt and declining productivity.”

He noted: “What Australian workers, families and pensioners need and deserve is a real plan from the government to get the economy moving again.”

On Wednesday the September GDP figures will come out. The expectation is for annual growth of about 1.7%, although Mousina notes “the risk is for a lower GDP”.

Should that occur, no doubt the treasurer, as he did three months ago when we saw the worst GDP growth for 18 years, will argue that “the fundamentals of the Australian economy are strong”. And yet it is clear from the raft of recent data that the overall figures merely reflect that the reality that fundamentals are very weak.

• Greg Jericho writes on economics for Guardian Australia


Greg Jericho

The GuardianTramp

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