Still hungover

It’s now 10 years since the rumblings of the Global Financial Crisis (GFC) first hit. In those 10 years, the economy has grown, but at a somewhat underwhelming pace. Business investment continues to be low. Real wages haven’t improved. And until only just recently, the labour market story has been one of excess capacity.

The Aus economy has been plagued by a GFC hangover for almost a decade now.

Last week however, the Australian share market hit a milestone. The ASX 200 rose above 6000 for the first time in decade. This is almost a return to pre-Crisis levels, but still not quite. The US’ S&P 500 meanwhile, returned to pre GFC levels FOUR YEARS AGO!

The table below shows compares how the Australian and US economies have changed in the 10 years after the GFC. The headline number is of course the difference in GDP. The US economy is nearly 15 per cent greater in real terms than it was at the end of 2007; the Australian economy now 25 per cent greater.

Australian and US economies, per cent change from late-2007 to now

	Australia	USA
Real GDP	25.0	14.8
Working age population (15-64)	18.2	4.7
Persons employed	16.0	6.3
Persons unemployed	51.1	-14.7
GDP per capita	5.8	9.7
Retail sales	15.6	9.9
Manufacturing output	0.4	2.0
Manufacturing employment	-13.5	-9.3

Source: The OCE’s Industry Monitor, ABS and FRED.

By all accounts, the immediate effects of the GFC were much severe in the US than Australia. Over eight million jobs disappeared from the US economy in just a short, two year period. The US unemployment rate hit 10.0 per cent in 2009 and it took until May 2014 for those 8 million jobs to be recovered. If you adjust for population growth and demographic changes, US employment didn’t return to pre-GFC levels until July this year. The US unemployment rate is now (4.1 per cent) below what it was in late 2007 (5.0 per cent), but it took until the end of 2016 for that to happen.

Australia was one of two countries in the OECD that survived without a recession. While a number of major investment banks went belly up in the US, but not one of our major banks even posted a negative quarter.

We did see an increase in unemployment, but nothing like what happened in the USA. The peak of Australia’s unemployment rate was only two percentage points above pre-GFC levels. And where the US was in double digit unemployment with two years, Australia’s peak did not hit until late 2014. That said, where the US labour market now seems to have righted itself (wages aside), Australia’s unemployment rate today (5.5 per cent) remains about a percentage point above pre-GFC levels, with 710 thousand people looking for work.

A key difference between the Australian and US post-GFC experiences is that the Australian economy didn’t lose any (net) jobs as a result of the Crisis. Sure, more jobs would have been created in its absence, but we ever suffered a “jobs gap” like in the USA. In fact, the Australian economy has added jobs in 107 of the 118 months since GFC.

Population growth plays a big role in explaining the differences between the two economies. Australia has experienced much faster population growth over the last decade – particularly among those of working age. The number of persons aged 15-64 in Australia grew by 18 per cent – more than three million people – compared to less than 5 per cent growth in the US. Australia’s population surge is reflected in both the number of new jobs created (+16 per cent, 1.7 million people) as well as the number of persons unemployed (+51 per cent, 240 thousand people).

Notably, while population growth has helped expand the Australian economy, per capita incomes have not kept pace. In fact, per capita incomes in Australia have grown by almost 4 percentage points less than in the US over this period. Some of that is due to the increased participation, and some is due to the difference in productivity. Indeed, if Australia’s per capita incomes had grown at the same rate as in the US, GDP would be have risen by almost 30 per cent greater of the decade.