Real GDP per capita barely rising

GDP data published yesterday for the September quarter looked good for the economy and the Government, but a closer look shows revisions took the shine off the headline and the economy is still growing by importing people and working the existing population harder, rather than by increasing output per hour worked or productivity.

As any economist and honest politician will tell you, productivity isn't the main thing to focus on: it's the only thing that matters in the long run. It drives increases in real wealth and income and indicates how successful the economy and society is at increasing use and technology and skills to improve wages and asset values.

The spending growth came from consumers happier with surging house prices and bigger gross household incomes because of population growth through migration. Real GDP per capita was unchanged in the first nine months of 2019, with falls of 0.1 percent and 0.4 percent in the March and June quarters (technically a recession) offset by a 0.4 percent rise in the September quarter. Real GDP per capita rose 1.0 percent in the full year to September, but was up just 0.6 percent in the September quarter from the same quarter a year ago.

For me, this 0.6 percent annualised growth number is the true measure of the performance of the economy in the September quarter. Nothing like the 2.3 percent everyone else focused on.

"Per capita measures are being influenced by the noisy migration data, but weak per capita growth confirms that labour productivity remains soft," said ANZ's Sharon Zollner. (See ANZ's chart below)

Total growth (ie not per capita) of 0.7 percent for the quarter was higher than the economists' consensus forecast for growth of around 0.5 percent and more than double the Reserve Bank's 0.3 percent forecast. Annual growth rose to 2.3 percent from 2.1 percent, although it's worth remembering our population also grew 1.7 percent over the year.

However, a closer look showed downward revisions to GDP growth of 0.6 percentage points in the March and June quarters, albeit offset by growth revisions higher in the September and December 2018 quarters.

"The revised results show that average annual growth rates held up for slightly longer than previously published. However, recent trends remain unchanged, with average annual growth rates slowing over the past few quarters," Stats NZ national accounts senior manager Gary Dunnet said.

Economists said they still saw the Official Cash Rate needing to be cut one more time to 0.75 percent from the current 1.0 percent, possibly in May.

"All up, despite the slightly stronger print than expected, today’s data reflect an economy that slowed sharply in 2019 – indeed, more sharply than we had previously believed. But the good news is that forward-looking indicators suggest a stabilisation in growth going into 2020," Zollner said.

"In the meantime, growth continues to fall short of the roughly 2.6 percent (annualised) rate that the RBNZ needs to see exceeded for inflationary pressure to build. And looking forward, it remains a story of growth just not quite delivering what the RBNZ needs to be confident of hitting its inflation target, with inflation pressures set to wane in this environment and inflation expectations at risk of falling further."

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