Reality check for Australia’s new PM: Living standards have fallen 1.4% a year since 2011, says AB

Political opinion polls and consumer sentiment data in Australia have surged in the two weeks since Malcolm Turnbull became Prime Minister, but global asset manager AllianceBernstein (AB) questioned today whether the lighter mood may be underestimating the seriousness of the economic challenges facing the country.

“Most people rely on gross domestic product or GDP as a measure of economic welfare, even though economists agree that it’s actually quite a flawed metric,” said Guy Bruten, AB’s Senior Economist—Asia Pacific.

“In our view, the GDP figures don’t really reflect what’s been going on in the Australian economy since 2011, when the commodities boom ended and our unusually favourable terms of trade—in which the prices we received for our exports were far in excess of what we paid for imports—began to fade.

“During that period, GDP slowed from 3.7% to 2.5% which, while lower, was hardly shabby. If you look a little deeper than GDP allows you to, however, the picture looks a lot more serious.”

According to Bruten, a better measure of the true state of Australian living standards is net national disposable income per capita (NNDIPC), which adjusts for shifts in terms of trade, population growth, net flows of income to overseas—including, for example, to foreign-owned mining companies—and depreciation of capital stock.

“NNDIPC shows that, after the huge swings of the 1980s, Australia settled into a remarkably long and consistent period of prosperity,” said Bruten (see diagram below).

“From the end of 1992 until the Lehman Brothers shock in September 2008, growth in household disposable income per person averaged a remarkable 3.2% a year, with very little volatility. The first half of the period reflects the payoff from the economic reforms of the 1980s, while the second half reflects the China-driven commodity price boom.

“But that era is now clearly over. Since the end of 2011, this measure of living standards has been going backwards at a rate of 1.4% a year—a reflection, largely, of the decline in the terms of trade.”

The chances of this situation improving during 2016 were slim, said Bruten, as there appeared to be “still some way to go” before Australia sees an end to the drag effect of the end of the commodities boom, and a pick-up in the non-mining sectors of the economy.

“The honeymoon for Mr Turnbull may be quite short, given the sobering economic environment dictating Australian households and business,” said Bruten.

“Our baseline scenario says that solutions to Australia’s problems will require both innovation and time, and it remains to be seen whether Mr Turnbull can shorten this process with his new approach to leadership.”