Bob Cunneen, Senior Economist and Portfolio Specialist, NAB Asset Management
Eight years after the dramatic financial crisis, the global economy is yet to hit full speed. Economic growth has been fickle and modest since the pain of 2008. The combination of high debt, weak investment and slowing population growth appears to be constraining economic growth. Given these headwinds, are we confronting a long-term destiny of stagnation? Is Australia “turning Japanese”, like the one hit wonder song by The Vapors, by being incapable of achieving strong growth – just like Japan has struggled over the past 20 years?
Secular stagnation is when an economy performs below potential for a very long period. Essentially the symptoms of stagnation are slower economic growth, lower inflation and higher unemployment compared to the past. This ‘stagnation’ syndrome can be traced back to the Great Depression of the 1930s, but has been recently revived by Lawrence Summers, Professor of Economics at Harvard1. Summers’ modern hypothesis suggests that economies confront the danger of stagnation. This can be caused by excessive leverage and slower population growth. Japan is the first “modern” example of secular stagnation according to Professor Summers. Hence the critical question is: does this stagnation hypothesis apply to Australia?
Australian households have dramatically leveraged up over the past 35 years by taking on more debt compared to their income. Chart 1 shows that in 2015, the household debt to income ratio was 185% in Australia. Effectively this is $1.85 of debt for every $1 of income. In contrast, Japan’s household debt to income ratio has barely moved over the past decade and remains elevated at 130%. These household debt measures suggest that Australia is not yet “turning Japanese” by being reluctant to borrow and spend. While admittedly there may be an eventual day of debt reckoning for Australia, for now there is no sign that Australian consumers are refraining from spending on consumption and housing given their debt commitments.
Chart 1: Percentage of household debt to disposable income
Source: Reserve Bank of Australia and Datastream.
Australia’s business sector is more conservative about taking on debt than both Australian households and Japanese corporations. Australia’s corporate debt was 82% of nominal GDP at the end of 2015, matching the high of 2008 set during the GFC, as shown in Chart 2. However, this is significantly less than Japan’s corporate borrowing which is currently 101% of nominal GDP. Japan’s corporate debt peaked at 148% back in 1993 in the aftermath of Japan’s ‘bubble years’ during the 1980s.
Chart 2: Corporate debt as a percentage of nominal GDP
Source: Bank of International Settlements and Federal Reserve St Louis.
Chart 3 shows how Australia’s business investment surged from 2002 to 2012 in a similar pattern to Japan’s investment boom in the 1980s. However, this was due to the mining investment boom which was financed significantly by the mining companies through equity and debt, and not like the colossal corporate debt binge that Japan incurred three decades ago. Mining investment in Australia is now in a secular downtrend, but the non-mining sector has considerable scope for capital spending in the current era of low interest rates.
Chart 3: Real business investment as a percentage of real GDP
Source: Australian Bureau of Statistics and Cabinet Office of Japan.
Australia’s annual population growth slowed between 2009 and 2015 from 2% to 1.3%, as shown in Chart 42. This largely reflects lower immigration. While an ageing population is a concern for Australia’s long-term growth prospects, Japan confronts an even more ominous demographic challenge with an ageing and declining population. Its population has been falling -0.2% per year since 2010, and 26% of its population is aged over 65 years compared to Australia’s lucky 15% with grey hair3. So while Australia’s population is still expanding in size, it is ageing slowly in comparison to Japan’s.
Chart 4: Annual percentage change in population
Source: World Bank and Australian Bureau of Statistics.
But Australia may have lower growth prospects than the optimism around the recent housing and mining booms indicates. Household debt is high, business investment is subdued and population growth is slowing. However, in comparison to Japan, Australia’s corporate debt is modest and its population is still growing. So the weight of evidence suggests that Australia is not yet “turning Japanese” or about to fall on its samurai sword in terms of economic growth. There is less probability of secular stagnation for Australia than for Japan. Nonetheless, even for Japan, debt and demographics are not destiny, for humanity’s capacity for innovation, invention and intuition can overcome these secular growth challenges.
1. ‘US economic prospects: secular stagnation, hysteresis and the zero lower bound’, Lawrence Summers, 2014.
2. Australian demographic statistics, catalogue 3101.0, Australian Bureau of Statistics. (Note: 1.3% is the preliminary estimated annual population growth rate for the year ended 30 September 2015.)
3. ‘Population aged 65 and above’, www.data.worldbank.org/indicator/SP.POP.65UP.TO.ZS, as at 16 June 2016.
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