Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
The New Era of Australians
I was wrapping up my weekly email for Strategic Intelligence subscribers when it finally hit my inbox.
I’d been waiting for it all morning.
That is, the June gross domestic product (GDP) figures — the numbers that tell us how wealthy Australia is.
Now, I get it, I know analysing a bunch of stats isn’t everyone’s idea of a good time.
However, yesterday it was particularly amusing.
You see, I’d spent most of the morning explaining that an Australian recession was mere months away.
But the data from the Australian Bureau of Statistics suggested otherwise.
The ‘economy grew 0.9% for June quarter’ it told me.
Giving us a whopping 3.4% annualised economic growth.
A country growing over 3% is hardly about to enter a recession, right?
Does that make my entire analysis wrong?
Not a chance.
In fact, the recession may be much closer than we think.
Let me show you why.
On the surface, the GDP numbers suggest things are good for Australia.
For starters, both export volumes and commodity values are up. Coal had its best three months since 2014. And liquid natural gas and iron ore sales were stand-out performers. As commodity prices increased, so did mining investment.
In fact, investment in mine sites suggest there’s a commodities mini-boom around the corner.
Housing investment also grew. There was a spurt in the construction of new dwellings. There’s evidence that households have started spending again.
And of course, government spending has really ramped up. It’s grown some 5.1% in the past year.
With a round up like that, of course Australia’s income looks broad and even.
Three key sectors that support the Aussie economy are witnessing increased activity.
The problem here isn’t so much in what the government did or didn’t spend. Or what iron ore was worth when we put it on a boat.
The real driver of the Aussie economy is the consumer.
Average Aussie scrapes by
Never forget that consumption accounts for 55% of Australian GDP.
Which is why our Federal Treasurer, Josh Frydenburg, got all excited when he announced the news that Aussies were spending once more.
Household consumption increased by 0.7%, which sounds quite strong. Yet, once you go through the data, it’s not really the return of the consumer driving the economy.
It’s more like the average Joe scraping by.
Turns out, the increase in consumption mostly came from necessary spending, rather than discretionary spending.
Take spending on food and insurance, for example. It rose 1.3% and 0.9% respectively.
But these are the things we have to buy.
One of the few discretionary categories (the fun things we like to spend our money on) is recreation and culture. It rose 1%.
Yet, that was one of the few fun sectors where we spent our money. Other discretionary items, like the purchase of vehicles and hotels, cafes and restaurants, were down 1.8% and 0.3% respectively.
Of course, the lack of fun spending isn’t surprising.
While the compensation of employees – that is, total value of wages – was up 0.7% for the quarter, the individual wage eked out a pithy 0.1%.
Not only that, but for the first time in a decade, the household savings rate dipped to 1%.
Aussie savings dip to lowest level in 10 years
Source: Thomson Reuters DataStream, ABC, ABC News
In other words, across the board, wages were up. But that’s only because the number of people working has gone up.
Individual wages, on the other hand, barely saw any increase at all.
So, what does all this mean?
The recession is already here
What we are witnessing is an Australian economy careening towards a recession at breakneck speed.
Companies have the money to employee more people and invest in their business.
But the effects are not ‘trickling’ down to the consumer.
That’s you and me.
In spite of people spending more, it’s not the sort of spending that makes the economy tick.
The Australian consumer, dear reader, is not alive and well.
Instead, we are witnessing the average Aussie raid the piggy bank to buy the necessities to survive.
The bean counters and politicians can claim the Australian economy is in rude good health.
The data may portray that.
But at an individual level, it’s very different.
The fact is, non-existent wage growth and the disappearing savings are the GDP numbers we should pay attention to.
Australia may not be in a recession yet.
But for many Aussies, their recession is already here.
It’s just a question of when the rest of us join them.