Australia’s economic data does not compute

Australian Bureau of Statistics' data sets show GDP at odds with labour force statistics — which makes no economic sense, writes Stephen Koukoulas.

SOMETHING is not quite right with the data on the Australian economy.

Never before has annual real gross domestic product (GDP) growth of 1.0 per cent – building on 18 months of economic sluggishness – been accompanied by booming job creation.

And – after a moderate lift in 2023 and early 2024 – a steady unemployment rate of a tick or two around 4 per cent.

GDP growth is at a 30-year low — the unemployment rate is near a 50-year low.

This makes no economic sense.

When GDP is barely growing firms are under financial stress. They limit or even reduce their hiring levels and with a lag — the pace of job creation slows and the unemployment rate rises at a steady pace.

Which is accurate? The measures and estimates of GDP or the labour force with employment and unemployment?

The simple answer is both could be correct — or that we don’t yet know.

Australia has also seen the boom in job creation coincide with clear signs of moderating wage growth – again, something that rarely if ever happens in any sustained way.

And, this with a government-inspired lift in wages in a few essential services – as well as chunky increases in minimum wage awards by the Fair Work Commission (FWC) – rather than a strict demand driving wages surge.

Wages growth would be materially without these interventions.

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Taking a step back on economic data

It could be that the estimates of GDP are understating economic growth and/or the labour force data are overstating the strength of employment.

Or it could be the lags involved between a broad downturn in economic growth and the pass-through to rising unemployment is longer and more moderate in this cycle.

It is also possible that the structural changes in the economy – the labour market and technology – are feeding distortions in data.

If this is the reason, there are significant implications for policymakers on issues like the potential growth of the economy, full employment and the inflation target.

As a small example and possible explanation, someone who loses their "regular" job because the company they were working for has lost business from the weak economy, can quickly join Uber in an effort to support their income.

This example would see employment maintained even though there is almost certainly a step down in output.

Or, think of a person aged around 62 or 63, for example, who because of the rules around superannuation "retires" so they can tap into their savings.

They move from a 40-hour-a-week job but still work in paid employment for 10 or 15 hours a week — to earn a little cash and to keep busy and stimulated in "retirement".

We know that the workforce participation rate of those aged 55 years and over is rising strongly.

The output of these individuals has dropped, clearly — but employment is unchanged.

There are plenty of other examples similar to Uber drivers and early retirees that might be impacting the data.

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Or is there a problem with the data?

The Australian Bureau of Statistics (ABS) is one of the best statistical agencies in the world, even more so under the stewardship of David Gruen, the Chief Statistician.

Its collection of data is thorough, detailed, rigorous — and, most importantly, as accurate as possible.

The current conundrum in some of the economic data is in no way a reflection of the ABS.

It is agile, and quick to change its concepts, sources and methods of collecting data as events and structural changes in how economic functions unfold.

The sources for the information on the national accounts and the labour force are – largely – different.

There is a partial overlap with some of the household incomes and related data but generally, the data are collected and compilated from different sources.

This begs a series of questions regarding the current technological revolution, artificial intelligence boom, post-COVID distortions in "working from home", behavioural changes to work, the boom in services-based professions and occupations and retirement.

Any of these may impact the measurement of employment and economic output.

The resolution of these apparent economic inconsistencies will be resolved.

The law of economics that shows the relationship between economic growth and the labour market has not changed. However, the extent of the correlation, the lags and even the way these are measured may have changed.

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The policy dilemma

These changes mean there is a great risk of a policy error.

The Reserve Bank of Australia (RBA) did not cut interest rates in September – because it judged the labour market to be tight even though essential elements are demanding urgent interest rate cuts – two examples would be weakness in economic growth and the slide in inflation.

Thankfully, an issue which should minimise the risk of policymakers "getting it wrong" is the bevy of other indicators of the economy.

Measures for consumer and business sentiment – house prices, the stock market, building approvals, retail spending, job vacancies and advertisements, wages, population, exports, imports, producer prices and credit growth, to name but a few – all contain useful snippets of information on the economy.

If the bulk of these indicators point to the economy performing in a particular direction, it should help to overcome the GDP versus unemployment rate dilemma.

This brings us back to the here and now and the shocking strength of the recent labour force data.

These data sets that are at odds with just about everything else. Look at a broad cross-section of the items mentioned a couple of paragraphs above and there is a clear picture of weakness and falling inflation.

It suggests easier monetary policy is needed and if that means the unemployment rate stays near 4 per cent – rather than hitting the 4.5 per cent widely anticipated by Treasury and the RBA – that is a good thing.

Treasury's net migration data playing into Dutton's narrative

RBA is in the 'no rate cut camp' currently occupied by Japan, Taiwan, Malaysia, Norway, India, Brazil, Russia & Turkey.
Strange bed fellows indeed.
CPI next week will see inflation below 2.5%.
Hard to see what the RBA is waiting for; or is it another error?
My Two Minute Take pic.twitter.com/B65FHhj0iH
— Stephen Koukoulas (@TheKouk) October 22, 2024

Stephen Koukoulas is an IA columnist and one of Australia’s leading economic visionaries, past chief economist of Citibank and Senior economic advisor to the Prime Minister. You can follow him on Twitter/X @TheKouk.