Australia’s NGDP problem

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I think that the increased focus on NGDP these days is good. Firms and households live in a nominal world, so it’s important to think about the nominal picture. However, too much of a good thing is also a problem, and a focus on NGDP gives a misleading view of what’s going on in Australia just now.

The chart below shows the annual average pace of NGDP growth (nominal income in the economy) and nominal household gross disposable income over the past 40 years. As you would expect, there’s typically a strong relationship between the two series. When total income in the economy is strong, households tend to do well too.

However, when you look at the tail end, you can see that (like many relationships) the relationship has broken down recently. I’ve shown the current decade below (in %YoY terms) so that you can see the breakdown more clearly.

So while income in the entire economy has accelerated to a solid 5.5% yoy (largely due to the terms of trade), household gross disposable income has slowed to 2%yoy. How can people expect inflation anywhere near the RBA’s 2.5% target, or strong real consumption growth when nominal household income is growing only ~2%yoy?

Fast NGDP growth is one reason people give, but once you know the details … it seems unlikely.

The ratio tells the story … the share of NDGP accounted for by Household Gross Disposable Income has fallen to around record lows. The chart below shows the annual average (64%), but in Q4’18 the ratio fell to 63.5%, which is the lowest since 2007/8.


  1. I’m going to assume that because our terms of trade so heavily influences NGDP, it means resources sector income flows through to household income via reinvestment from the sector. Mining investment has not followed the rebound in commodity prices/income this time, hence the relationship has broken down. Notch that down to the huge writedowns booked during 2011-2013 from misallocated capital during the boom! Are there other factors as well to consider?

  2. Thanks for the post Ricardo.I come back to the same question I had on your previous post – what (else) but NGDP growth could explain the boom in employment growth over the period since 2H16? It would be interesting to add jobs growth to your second chart to see which series it follows better. The divergence you track between NGDP and NHGDI is no wider now than in 2017 when the jobs boom – and NGDP growth – hit its peak even though NHGDI was still pretty tepid. I’m sure that nominal wage growth expectations have fallen since 2010 and that could explain some of the jobs boom via increased sensitivity of employment to NGDP or NHGDI growth, but it’s still hard to believe that peak NHGDI of 3.75% y/y in 2017 (compared with NHGDI growth rates of >3.75% over 2013-15 that were associated with less job creation) could be enough to get the jobs growth we have had recently. NGDP growth looks like a better fit. The litmus test might be whether decent jobs growth continues over the first half of 2019 given that the two series are diverging again.

    Even if employment growth follows NGDP growth more closely, that doesn’t mean I have a convincing explanation for why. I take what BK says that we haven’t seen a mining investment response this time. Maybe the federal and state government spending on NDIS and infrastructure has been responsible and the reason we don’t see it in the budget deficit figures is that government revenues have risen due to mining profits and hitherto robust stamp duties? A tenuous story perhaps…? Also, I can’t see those forces as being strong enough to create the number of jobs we’ve seen.

  3. My very good friend,

    I think all people owe you a debt of gratitude.
    We all live in the nominal economy yet until they changed drastically in the Swan years we simply assumed the real and nominal GDP rates are similar.
    We know much better now

    1. Thanks mate. Though I’m not sure the dates line up so well with the governments — and for sure i don’t have a partisan agenda.

  4. I never said you had nor implied it . All I was doing was thanking you for pointing out how important the nominal economy is.
    Anyone looking at the Nominal economy rather than the real economy has understood for example how the budget was going and why the electoral pols were as they were.

    I think Treasury for one was slow in picking this up.

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