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.
This article is issued by nabInvest Capital Partners Pty Limited (ABN 44 106 427 472, AFSL 308953) (“NCP”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) (“NAB”) group of companies (“NAB Group”). An investment in any product or service referred to in this publication does not represent a deposit or liability of, and is not guaranteed by NAB or any other member of the NAB Group.
This information may constitute general advice. It has been prepared without taking account of an investor’s objectives, financial situation or needs and because of that an investor should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs.
MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”) is the issuer of the MLC Wholesale Inflation Plus – Conservative Portfolio, MLC Wholesale Inflation Plus – Moderate Portfolio and the MLC Wholesale Inflation Plus – Assertive Portfolio (collectively, the “MLC Inflation Plus portfolios”). The MLC Inflation Plus portfolios are also available via the MLC MasterKey Super & Pension Fundamentals and the MLC MasterKey Business Super products issued by NULIS Nominees (Australia) Limited (ABN 80 008 515 633, AFSL 236465) and the MasterKey Investment Service Fundamentals investor directed portfolio service operated by MLC . You should obtain the relevant Product Disclosure Statement (“PDS”) or Financial Services Guide (“FSG”) relating to the MLC Inflation Plus portfolios and consider them before making any decision about whether to acquire or continue to hold the product. A copy of the PDS and FSG is available upon request by contacting our call centre on 1300 738 355 or on our website at nabam.com.au.
Any references in this publication to specific companies are for illustrative purposes only and should not be taken as a recommendation to buy, sell or hold securities in these companies.
Any opinions expressed in this document constitute NCP’s judgement at the time of issue and are subject to change. NCP believes that the information contained in this publication is correct and that any estimates, opinions, forecasts, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice) and actual events may vary materially. NCP relies on third parties to provide certain information and is not responsible for its accuracy. NCP is not liable for any loss arising from any person relying on information provided by third parties.
Investment managers are current as at the date this communication was prepared. Investment managers are regularly reviewed and may be appointed or removed at any time without prior notice to you.
Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. This information is directed to and prepared for Australian residents only. Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) do not approve or endorse any information included in this material and disclaim all liability for any loss or damage of any kind arising out of the use of all or any part of this material.
The funds referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds.