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.