Why it feels like a recession despite the growth

The decline in national income of 1.1% has come despite a hefty 3.1% increase in real gross domestic product (GDP) over the same period.

The disparity between the decline in national income during a period of significant economic expansion sounds counter-intuitive and raises the question of whether we should be concerned by it.

To understand the issues, we first need to understand what real GDP measures and how it differs from income.

Real GDP is a measure of production. It measures the amount of products (goods and services) made in the Australian economy (whether or not these goods are consumed here) and as such reflect national effort.

In contrast, real income (as measured by NNDI) measures the products that can be purchased from that effort – how well off we feel.

The differences between real GDP and real income (as measured by NNDI) arise for four main reasons:

1. We produce different goods than we consume (for example, we produce iron ore and coal and consume imported televisions), and the prices of these bundles vary (this is also known as the terms of trade)
2. Income can be produced overseas and remitted to Australia (from Australian’s investing abroad), or produced in Australia but remitted to foreigners (think of a foreign-owned mine)
3. The equity value of our super funds can go up or down
4. We pay tax

Figure 1 decomposes the 4.2 percentage point gap between output and (GDP) and income (NNDI) into these factors.

Figure 1   Factors contributing to difference between annual GDP and income growth, Australia

Data source: ABS National Accounts, March Quarter

The continuing decline in our terms of trade (how valuable are our exports compared to what we have to pay for imports) contributed around 2.5 percentage points to the difference between production and income. This largely reflects falls in global prices for the commodities (such as coal, gas and iron ore) we export to the rest of the world.

A significant increase in net income to foreigners over the year contributed another 0.9 percentage points to the difference, most likely reflecting the high levels of foreign investment that occurred during the mining investment boom.

Finally, changes to taxes (including from bracket creep) and falls in super fund equity subtracted a further 0.8 percentage points from income growth.

Figure 2 shows the change in real income (measured by NNDI) and explains why we might feel like we’re in a recession even though output continues to expand strongly. The 2.4% decline in NNDI over the past year follows similar declines for the previous 3 straight years. Since March 2013, incomes have fallen by almost 6%.

Put in a historical context, the last time we had a significant fall in national incomes occurred during the 1990’s recession. The current decline in real income is actually greater than the falls in the 90’s and may not yet be over.

Figure 2   Per capita Net National Disposable Income, growth, 1993 to 2016

Data source: ABS National Accounts