My colleague Nick Behrens from QEAS is critical of recent references to Australia’s “GDP per capita recession” by the media and the federal Opposition in his latest post A GDP per capita recession is nonsense. Recall that the December quarter 2018 National Accounts data released by the ABS last week revealed that Australia has now recorded two consecutive quarters of declining GDP per capita (-0.1% in Sep-18 and -0.2% in Dec-18, as shown in the chart below).
I agree with Nick to some extent. We should be careful calling a “recession” based on the GDP per capita numbers, as the economy may still pull out of this recent slowdown, but I do think it is useful to consider the GDP per capita numbers nonetheless. If an economy is not growing faster than the population, then it’s likely it’s not performing well.
Australian Treasury economists Robert Ewing and John Hawkins acknowledged the value of GDP per capita data in their outstanding 2006 Conference of Economists paper Business Cycles in Australia. Ewing and Hawkins recognised that GDP per capita is more relevant to individuals than GDP on p. 26:
We use GDP per capita partly as it is more related to welfare than is aggregate GDP.
Due to our high rate of immigration, Australia has a relatively high population growth rate for an advanced economy. This is good for Australia’s GDP growth rate, a point Nick Behrens makes in his interesting post, but it’s not necessarily good for Australians, in my view. We need to consider the pressures that high population growth places on infrastructure, for example. Too high population growth could lead to greater congestion, a fall in productivity growth, and lower GDP per capita growth than otherwise. Population growth is not necessarily a good thing just because it boosts GDP.
We shouldn’t fool ourselves into thinking our economy is performing better than it is by ignoring the contribution of population growth to GDP growth. And now, when GDP growth is falling below population growth, we should recognise the economy is not performing well at all.
Ah does Utility = GDP Gene?
No. GDP per capita isn’t a perfect measure of welfare/utility obviously but if we’re interested in welfare then we’re better off consider GDP per growth rather than GDP growth, which is the point the Treasury paper is making. Thanks for the comment Alistair!