The economy is readying for faster growth

The last three months of 2017 were yet another quarter of weak growth in the economy. Fortunately, however, they weren't as weak as we've been led to believe.

According to the national accounts, issued this week by the Australian Bureau of Statistics, real gross domestic product grew by 0.7 per cent in the previous quarter, but slowed to 0.4 per cent in the December quarter.

This caused the annual rate of growth to slump from 2.9 per cent to 2.4 per cent.

Trouble is, the sudden slowdown is largely the product of quarter-to-quarter volatility, caused by one-off factors and unexplained "noise" in the figures – noise that stops you hearing the signal those figures are trying to send.

This is why the bureau also publishes "trend" or smoothed figures, which reduce the noise and make it easier to hear the underlying signal.

The trend figures show the economy growing at a fairly steady rate of 0.6 per cent a quarter, and by 2.6 per cent over the year to December.

This is likely to be closer to the truth, though it's still weaker than we've been hoping for, especially since employment grew by a remarkably strong 3.3 per cent during 2017 – almost 400,000 more souls.

How can the economy's production of goods and services grow by only 2.6 per cent when the number of people employed to produce those goods and services has grown by 3.3 per cent?

Over a period of more than a few years, it can't. But over shorter periods it's surprisingly common for the standard relationships between economic variables not to show up in the figures. Why? In a word: noise. (And noise not even statistical smoothing can penetrate.)

Note, however, that for as long as employment is growing faster than production, the productivity of labour will be falling, just as a matter of arithmetic. If you think employment growth is a good thing, this temporary fall in productivity is nothing to worry about.

To emphasise how weak quarterly growth averaging 0.6 per cent is, consider this. Growth in GDP per person is averaging only about 0.2 per cent a quarter.

This gives annual growth in GDP per person of 1 per cent. (Huh? Four quarters of about 0.2 per cent adds up to 1 per cent? Yes. You can't just add 'em up, you have to allow for compounding - otherwise known as "interest on the interest", as in compound interest.)

To have GDP growth of 2.6 per cent, but growth per person of only 1 per cent, is a reminder of how fast our population is growing, and how much of our growth (almost invariably faster than the growth rates of those rich countries whose populations aren't growing much) comes merely from population growth – a point every economist knows, but few bother pointing out to the uninitiated.

And don't hold your breath waiting for any treasurer to point it out. To those guys, a big number is a big number – and what's more, it's solely the result of our government's wonderful policies.

But back to the reasons this week's news of further weak growth isn't as bad as it sounds.

The first is that annual growth of 2.6 per cent isn't a lot lower that our estimated "potential" (medium-term average) rate of growth of 2¾ per cent.

It's true, however, that we've been growing at below our non-inflationary potential rate for so many years we've acquired such a lot of spare production capacity (including unemployed and under-employed workers) – such a big "output gap", in econospeak - that we could and should be growing a fair bit faster than that medium-term speed limit of 2¾ per cent, until the spare capacity's used up.

Another indication things aren't a bad as they've been painted is Reserve Bank governor Dr Philip Lowe's statement that this week's figures give him no reason to revise down the Reserve's forecast that growth will strengthen to 3 per cent this year and next.

Why so confident? Because when you look into the detail of this week's results, you see more signs of strength than weakness. (From here on I'll switch to quoting the unsmoothed figures favoured by those who prefer the exciting confusion of noise to the boring wisdom of signal.)

First point is that "domestic demand" (gross national expenditure) grew over the year at the healthy rate of 3 per cent, meaning it was a fall in "net external demand" (exports minus imports) that caused growth in aggregate (domestic plus external) demand to be only 2.4 per cent.

The fall in the volume of "net exports" (exports minus imports) was caused mainly by a fall in exports, but there's little reason to believe this was due to anything other than temporary factors.

Turning to the biggest components of domestic demand, we've been worried that consumer spending wasn't growing strongly because of the lack of growth in real wages. But this week's figures show consumer spending growing by 1 per cent during the quarter and a healthy 2.9 per cent over the year.

Quarterly growth of 1 per cent won't be sustained, but an upward revision to the previous quarter's growth adds to confidence that household consumption is stronger than we'd believed.

All the increased employment is boosting household income, even if real wage growth isn't.

Business investment in new equipment and structures fell by 1 per cent in the quarter, but this was explained by another fall in mining investment (which falls are close to ending) concealing stronger than expected growth in non-mining investment (as estimated by Treasury) of 2.1 per cent in the quarter and 12.4 per cent over the year.

As Paul Bloxham, of the HSBC bank, summarises, "the key drivers of domestic demand – household consumption and non-mining business investment – were strong, and should drive a lift in overall growth in 2018".

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We should change the culture of Christmas

Christmas, we're assured, brings out our best selves. We're full of goodwill to all men (and women). We get together with family and friends – even those we don't get on with – eat and drink and give each other presents.

We make an effort for the kiddies. Some of us even get a good feeling out of helping ensure the homeless get a decent feed on the day.

And this magnanimous spirit is owed to The Man Who Invented Christmas, Charles Dickens. (You weren't thinking of someone else, surely?)

According to a new survey of 1421 people, conducted by the Australia Institute, three-quarters of respondents like buying Christmas gifts.

Almost half – 47 per cent – like having people buy them gifts. And 41 per cent don't expect to get presents they'll never use.

Well, isn't that lovely. Merry Christmas, one and all!

Of course, there's a darker, less charitable, more Scrooge-like interpretation of what Christmas has become since A Christmas Carol.

Under the influence of more than a century of relentless advertising and commercialisation – including the soft-drink-company-created Santa – its original significance as a religious holy-day has been submerged beneath an orgy of consumerism, materialism and over-indulgence.

We rush from shop to shop, silently cursing those of our rellos who are hard to buy for. We attend party after party, stuffing ourselves with food and drinking more than we should.

All those children who can't wait to get up early on Christmas morning and tear open their small mountain of presents are being groomed as the next generation of consumerists. Next, try the joys of retail therapy, sonny.

But the survey also reveals a (growing?) minority of respondents who don't enjoy the indulgence and wastefulness of Christmas.

A fifth of respondents – more males than females – don't like buying gifts for people at Christmas. Almost a third expect to get gifts they won't use and 42 per cent – far more males and females – would prefer others not to buy them gifts.

The plain fact is that a hugely disproportionate share of economic activity – particularly consumer spending – occurs in one month of the year, December.

And just think of all the waste – not just the over-catering, but all the clothes and gadgets that sit around in cupboards until they're thrown out. All the stuff that could be returned to the store, but isn't.

At least the new practice of regifting helps. Unwanted gifts are passed from hand to hand, rather like an adult game of pass-the-parcel, until someone summons the moral courage to throw them out.

Still, buying things that don't get used is a good way to create jobs and improve the lives of Australians, no?

Not really. The survey finds only 23 per cent of respondents agree with this sentiment, while 62 per cent disagree.

One change since Scrooge's day is that those who worry most about waste – at Christmas or any other time – do so not for reasons of miserliness, but because of the avoidable cost to the natural environment.

Rich people like us need to reduce our demands on the environment to make room for the poorer people of the world to lift their material standard of living without our joint efforts wrecking the planet.

This doesn't require us to accept a significantly lower standard of living, just move to an economy where our energy comes from renewable sources and our use of natural resources – renewable and non-renewable – is much less profligate.

This is the thinking behind the book Curing Affluenza, by the Australia Institute's chief economist – and instigator of the survey – Dr Richard Denniss.

He says we can stay as materialists (lovers of things) so long as we give up being consumerists (lovers of buying new things). We can love our homes and cars and clothes and household equipment – so long as that love means we look after them, maintain and repair them, and delay replacing them for as long as we reasonably can.

The survey shows we're most likely to repair cars, bikes and tools and gardening equipment, but least likely to repair clothing, shoes and kitchen appliances, such as blenders, toasters and microwaves.

What would encourage us to get more things repaired? Almost two-thirds of respondents would do more if repairs were covered by a warranty. More than 60 per cent would do more if repairs were cheaper. And 46 per cent if repairs were more convenient – which I take to mean if it was easier to find a repairer.

How about making repair work cheaper by removing the 10 per cent goods and services tax on it? Two-thirds support the idea; only 19 per cent oppose.

Point is, there are straight-forward things the government could do to encourage us to repair more and waste less. Were it to do so, this would help restore older attitudes in favour of repairing rather than replacing.

Trouble is, politicians tend to be followers rather than leaders on such matters. So the first thing we need is a shift in the culture that makes more of us more conscious of the damage our everyday consumption is doing to the environment. That putting out the recycling once a week ain't enough.

We could start by changing the culture of Christmas.

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Mixed news as economy readies for better times

Scott Morrison is right. We're experiencing "solid" growth in the economy – provided you remember that word is econocrats' code for "not bad – but not great".

This week's national accounts from the Australian Bureau of Statistics show real gross domestic product grew by 0.6 per cent in the September quarter. Taking the figures literally, this meant the economy grew by 2.8 per cent over the year to September, way up on the 1.9 per cent by which it grew over the year to June.

But it's often a mistake to take the quarterly national accounts – the first draft of history, so to speak – too literally.

As Dr Shane Oliver, of AMP Capital, reminds us, the annual growth figure is artificially strong because the contraction of 0.3 per cent in the September quarter of last year dropped out of the annual calculation, whereas the 0.9 per cent bounce back in following quarter stayed in.

The bureau's trend (smoothed seasonally adjusted) estimates show growth of 2.4 per cent over the year to September, which is probably closer to the truth.

That compares with the economy's "potential" (maximum average rate of growth over the medium term, without rising inflation pressure) of 2.75 per cent a year. And with the Reserve Bank's forecast that growth over next calendar year will reach 3 per cent.

Since growth has fallen short of its potential rate for so long – creating plenty of spare production capacity – the economy can (and often does) grow faster than its medium-term "speed limit" for a few years without overheating.

And, although the latest reading isn't all that wonderful, there are enough good signs among the bad to leave intact the Reserve's forecast of better times next year.

(Remember, however, that much of the growth in all the figures I've quoted – and will go on to quote – comes from a simple, but often unacknowledged, source: growth in the population. The bureau's trend estimates show real GDP per person of just 0.3 per cent during the quarter and just 0.9 per cent over the year.)

Getting to the detail, we'll start with the bad news. Consumer spending – which accounts for well over half of GDP - grew by a minuscule 0.1 per cent during the quarter, and by a weak 2.2 per cent over the year to September.

Why? Because, despite remarkably strong growth in the number of people earning incomes from jobs, the increase in people's wages is unusually low – as measured by the national accounts, even lower than the 2 per cent registered by the wage price index.

Until now, households have been cutting their rate of saving so as to keep their consumption spending growing faster than their disposable (after-tax) income. They've probably been encouraged in this by the knowledge that the value of their homes has been rising rapidly, thus making them feel wealthier.

Now, however, Melbourne house prices are rising more moderately, while Sydney prices are falling a little. Price rises in other state capitals have long been more modest.

In the latest quarter, households' income rose faster than their consumption spending, meaning they increased their rate of saving. It's possible people have become more conscious of our record level of household (mainly housing) debt – though this is probably taking the (particularly dodgy) quarter-to-quarter changes too literally.

Next bit of bad news is that the boom in home building has finally topped out, with activity falling by 1 per cent in the quarter and by 2.3 per cent over the year.

There are a lot of already-approved apartments yet to be built, however. So, though home building's addition to growth has finished, it's future subtraction from growth shouldn't be great.

Which brings us to the first bit of good news. While investment in new housing has peaked, business investment in equipment and structures in the (huge) non-mining part of the economy is finally getting up steam.

According to estimates from Felicity Emmett, of ANZ bank, non-mining business investment rose by 2.7 per cent in the quarter, and by 14 per cent over the year.

The figures for business investment spending overall are even stronger, meaning spending in mining has been growing somewhat, not continuing to fall.

This doesn't mean mining investment has hit bottom, however. Higher commodity prices are prompting some minor investment, but there's a last minus yet to come from the completion of some big gas projects.

The other really bright spot is strong public sector investment in infrastructure – mainly road and rail projects in NSW and Victoria – which grew by 12.2 per cent over the year to September.

The external sector made no net contribution to growth, despite the volume of exports - minerals, rural, education and tourism - growing by 1.9 per cent in the quarter and by 6.4 per cent over the year.

That's because of a bounce-back in the volume of imports. Why, when consumer spending is weak? Because most investment equipment is imported.

If all these ups and downs are too equivocal to convince you the economy really is gathering strength, I have the killer argument: jobs growth.

As Morrison was proud to boast - apparently, all the new jobs are directly attributable to the government's own plan for Jobson Grothe​ - the increase in employment during the quarter was remarkable.

It rose by more than 90,000, with eight in 10 of those jobs full-time. Over the year to September, total employment rose by 335,000, an amazing increase of 2.8 per cent.

It's true the economy won't be back to its normal healthy self until wages are growing a bit faster than prices, reflecting the improvement in the productivity of labour (running at 1 per cent a year).

But an economy with such strong and sustained growth in full-time jobs simply can't be seen as sickly. And precedent tells us that where employment goes, wages follow.

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The real reason you're feeling the pinch

Maybe it's just me, but these days the more politics I hear on TV or radio, the less time it takes for my blood to boil. Just ask my gym buddies. "No point shouting at the radio, Ross, they can't hear you."

Last week, for instance, I heard the erstwhile Queensland leader of One Nation carrying on about what a big election issue the rising cost of living was. There was the cost of electricity ... but he ran out of examples.

High on my list of things I hate about modern pollies is the way they tell us what they think we want to hear, not what we need to know. Then they wonder why voters think they're phoneys.

As someone who's spent his career trying to help people understand what's going on in the economy, it's galling to hear politicians reinforcing the public's most uncomprehending perceptions.

The crazy thing is, the widespread view that our big problem is the rapidly rising cost of living is roughly the opposite of the truth.

It's true the price of electricity has been rising rapidly, lately and for many years, for reasons of political failure. But electricity accounts for just a few per cent of the total cost of the many goods and services we buy.

And the prices of those other things have been rising surprising slowly, with many prices actually falling. You hadn't noticed? Goes to show how wonky your economic antennae have become.

Annual increases in consumer prices have been so low for the past three years that the governor of the Reserve Bank, Dr Philip Lowe, is worried about how he can get inflation up into his target zone of 2 to 3 per cent.

Why would anyone worry that the cost of living isn't rising fast enough? Because, though it's hardly a problem in itself, it's a symptom of a problem buried deeper.

Which is? Weak growth in wages over the past four years. Rising wages are the main cause of rising prices. Price rises have been small because wage rises have been small.

It's the weak growth in wages that's giving people trouble balancing their household budgets – a problem they mistakenly attribute to a fast-rising cost of living.

What they've grown used to over many years is wages rising by a per cent or so each year faster than prices, and they've unconsciously built that expectation into their spending habits. When it doesn't happen, they feel the pinch.

For the past four years, wages have barely kept pace with the weak – about 2 per cent a year – rise in consumer prices.

This absence of "real" wage growth is a problem for age pensioners as well as workers because pensions are indexed to average weekly earnings – meaning they too usually rise each year by a per cent or so faster than prices.

Why would any economist worry that wages weren't growing fast enough? Because, as well as being a cost to business, wages are the greatest source of income for Australia's 9.2 million households.

And when the growth in household income is weak, so is the growth in the greatest contributor to the economy's overall growth: consumer spending.

It might seem good for business profits in the short-term, but weak wage growth eventually is a recipe for weak consumption and weak growth in employment. What sounded like a great idea at first, ends up biting business in the bum.

Weak wage and price growth is a problem in most rich countries at present, meaning it's probably explained by worldwide factors such as globalisation and technological change.

In a speech last week, Lowe opined that a big part of the problem was "perceptions of increased competition" by both workers and businesses.

"Many workers feel there is more competition out there, sometimes from workers and sometimes because of advances in technology" and this, together with changes in the nature of work and bargaining arrangements, "mean that many workers feel like they have less bargaining power than they once did".

"It is likely that there is also something happening on the firms' side as well . . . Businesses are not bidding up wages in the way they might once have. This is partly because business, too, feels the pressure of increased competition."

Lowe says a good example of this process is increased competition in retailing, where competition from new entrants (Aldi, for instance) is putting pressure on margins and forcing existing retailers to find ways to lower their cost structures.

Technology is helping them do this, including by automating processes and streamlining logistics (transport costs). The result is lower prices.

"For some years now, the rate of increase in food prices has been unusually low. A large part of the story here is increased competition. The same story is playing out in other parts of retailing. Over recent times, the prices of many consumer goods – including clothing, furniture and household appliances – have been falling," Lowe says.

"Increased competition and changes in technology are driving down the prices of many of the things we buy. This is making for a tough environment for many in the retail industry, but for consumers, lower prices are good news."

True. Which is why I find it so frustrating when idiot politicians keep telling people the cost of living is soaring.

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Economic garden gets back to normal - very slowly

With the year rapidly drawing to a close, the chief manager of the economy has given us a good summary of where it looks like going next year. The word is: we're getting back to normal, but it's taking a lot longer than expected.

The chief manager of the economy is, of course, Reserve Bank governor Dr Philip Lowe, and he gave a speech this week.

For years Lowe and others have been tell us the economy is making a difficult "transition" from the resources boom to growth driven by all the other industries. But now, he says, it's time to move to a new narrative.

"The wind-down of mining investment is now all but complete, with work soon to be finished on some of the large liquefied natural gas projects," he says.

Mining investment spending rose to a peak of about 9 per cent of gross domestic product in 2013, but is now back to a more normal 2 per cent or so.

This precipitous fall has been a big drag on the economy's overall growth, meaning its cessation will leave the economy growing faster than it has been.

As Lowe puts it, "this transition to lower levels of mining investment was masking an underlying improvement in the Australian economy". The decline in mining investment also generated substantial "negative spillovers" to other industries, particularly in Queensland and Western Australia.

This is a good point: weakness in the mining states has made the figures for the national economy look below par, even though NSW and Victoria have been growing quite strongly.

The good news, however, is that these negative spillovers are now fading. In Queensland, the jobs market began to improve in 2015, and in WA conditions in the jobs market have improved noticeably since late last year.

This is one reason Lowe expects the economy's growth to strengthen next year. Another is the higher volume of resource exports as a result of all the mining investment.

"We expect GDP growth to pick up to average a bit above 3 per cent over 2018 and 2019." This may not sound much, but "if these forecasts are realised, it would represent a better outcome than has been achieved for some years now.

"This more positive outlook is being supported by an improving world economy, low interest rates, strong population growth and increased public spending on infrastructure," he says.

And the outlook for business investment spending has brightened. "For a number of years, we were repeatedly disappointed that non-mining business investment was not picking up . . .

"Now, though, a gentle upswing in business investment does seem to be taking place and the forward indicators [indicators of what's to come] suggest that this will continue.

"It's too early to say that animal spirits have returned with gusto. But more firms are reporting that economic conditions have improved and more are now prepared to take a risk and invest in new assets."

The improvement in the business environment is also reflected in strong employment growth. Business is feeling better than it has for some time and is lifting its capital spending as well as creating more jobs.

Over the past year, the number of people with jobs has increased by about 3 per cent, the fastest rate of increase since the global financial crisis.

The pick-up is evident across the country and has been strongest in the household services (which include healthcare, aged care and education and training) and construction industries.

It's also leading to a pick-up in participation in the labour force, especially by women.

So, everything in the economic garden is back to being lovely?

No, not quite. Consumer spending – by far the biggest component of GDP – "remains fairly soft". It's been weaker than its annual forecast since 2011 and hasn't exceeded 3 per cent for quite a few years.

Why? Because of weak growth in real household income and our very high level of household debt. The weak growth in household income is explained mainly by the weak growth in wages for the past four years, which have barely kept pace with (unusually low) inflation.

Lowe says "an important issue shaping the future is how these cross-cutting themes are resolved: businesses feel better than they have for some time but consumers feel weighed down by weak income growth and high debt levels".

Let me be franker than the governor. The economy won't get back to anything like normal until we get back to the modest rate of real (above inflation) growth in wages we've long been used to.

Just what's causing the weakness in prices as well as wages – which is a problem occurring in most other developed economies – and whether the problem is temporary or lasting, is a question that's hotly debated, with Lowe adding a few pointers of his own.

He thinks it's partly temporary, meaning wage growth will soon pick up from its present (nominal) 2 per cent a year, and partly longer-lasting, meaning it may be a long time before it returns to its usual 3½ to 4 per cent.

"We expect inflation to pick up, but to do so only gradually. By the end of our two-year forecast period, inflation is expected to reach about 2 per cent in underlying terms . . . Underpinning this expected lift in inflation is a gradual increase in wage growth in response to the tighter labour market."

Here's his summing up:

"Our central scenario is that the increased willingness of business to invest and employ people will lead to a gradual increase in growth of consumer spending. As employment increases, so too will household income. Some increase in wage growth will also support household income.

"Given these factors, the central forecast is for consumption growth to pick up to around the 3 per cent mark" – which would still be below what was normal before the GFC.

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What we can do to cure affluenza

If our grandparents could see us now, what would they think? They'd be amazed by our affluence, but shocked by our wastefulness.

You'd never know it to hear us grousing about the cost of living, but most of us are living more prosperous, comfortable, even opulent lives than Australians have ever lived.

We live in a consumer society, surrounded by our possessions. We're always buying more stuff, more gadgets, an extra car, more TVs for other rooms, more laptops, iPads and smartphones.

We update to the latest model, even though the old one's working fine, and make sure our car is never more than a few years old.

We buy new clothes all the time – a lot on impulse – filling our wardrobes with stuff we wear rarely, if ever.

We buy more food than we can eat, chucking it out when it's no longer fresh so we can buy another lot.

Why do we keep buying and buying? Short answer: because we can afford to. Long answer: because, for a host of reasons, we've become addicted to consumption, whether or not it provides lasting satisfaction. We suffer from "affluenza".

Many of us engage in "conspicuous consumption" so as to impress other people with our wealth – with how well we're doing in the materialist race. Can't have the neighbours thinking we can't afford the latest model.

Other people use their hairstyles or the clothes they wear to express their individuality or, paradoxically, to signal their membership of a particular tribe.

I heard about a partner in a law firm remarking with disapproval that whenever any young person was made a partner they immediately went out and bought a black Volvo. But, someone asked, don't you have a black Volvo yourself? Oh, no, he said, mine's blue.

In his new book Curing Affluenza, Richard Denniss, chief economist of The Australia Institute, observes that, these days, much consumption is done for symbolic, signalling reasons, not because we actually need the stuff.

And then there's retail therapy – stuff we buy purely for the fleeting thrill we get from buying some new thing.

If something's telling you all this needless consumption can't be a good thing, you're not wrong. What's less obvious is why: because of the damage it does to the natural environment.

Not only the extra emissions of greenhouse gasses, but also excessive use of natural resources – both non-renewable and renewable, when usage exceeds the rate at which they can be renewed (think fish in the sea).

The richest 15 per cent of the globe's 7.6 billion population can continue living the high life only for as long as we have the wealth to commandeer more and more of the other 85 per cent's share of the world's natural resources.

But as the world's poor, led by India and China, succeed in raising their material living standards towards ours, this will get ever harder. It is not physically possible for all the world's population to live the wasteful lives we do. Nothing like all the world's population.

How can we stop using more than our fair share of the globe's natural resources? Denniss says we can start by distinguishing between consumerism, which is bad, and materialism, which isn't. Huh?

He defines consumerism as the love of buying things, whereas materialism is just the love of things. Meaning the latter is a cure for the former. The more we love and care for the stuff we've already got, repairing it when it breaks, the less we're tempted to buy things we don't need.

It's true the capitalist system invests heavily in marketing and advertising to con us into believing we need to buy more and more stuff.

But we're free to resist the system's blandishments. Indeed, I often think the people most successful in the system are those who most resist.

Unusually for an economist, Denniss argues that much of what we do – and buy – we do for cultural reasons. Because it's the normal, accepted thing to do.

But, just as our grandparents weren't as spendthrift as we are, culture can change. And you need less than a majority of people changing their behaviour to reach the critical mass that prompts most other people to join them and, by doing so, cause an improvement in the culture.

If we all stopped buying stuff we don't need, however, wouldn't that cause economic growth to falter and unemployment to shoot up?

Yes it would – if that's all we did. The trick is that every dollar we spend helps to create jobs. So we need to keep spending, but we don't need to keep spending wastefully.

There are a host of things we could spend on – better health, better education, better public infrastructure, better lives for the disabled and the elderly, less congestion, less pollution – that would yield us more satisfaction while doing less damage to the environment.

I have a feeling, however, that the cure to affluenza will require more than just changed behaviour by enough individuals. We replace rather than repair many things because the cost of repairers' labour greatly exceeds the cost of the material parts we throw away.

We need to rejig the tax system so we reduce the tax on "goods" – labour income – and increase the tax on "bads" – use of natural resources.

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Little Aussie battler battles on to future glory

Have you noticed how people are getting more upbeat about the economy? It's no bad thing. And, on the face of it, the figures we got this week confirmed their growing confidence.

The Australian Bureau of Statistics' national accounts showed that real gross domestic product grew by a very healthy 0.8 per cent in the June quarter. That's equivalent to annualised growth of 3.6 per cent.

But GDP growth is far too volatile from quarter to quarter for such calculations to make much sense (even though it's what the Americans do). And, just to ensure we don't get too confident, we have a media skilled in finding the lead lining to every silver cloud.

They lost no time in pointing out that half that growth came from increased consumer spending during the quarter of 0.7 per cent. But this return to strong growth was unlikely to be sustained because weak growth in wages meant much of the spending was covered not by an increase in household income, but by a decline households' rate of saving.

The household saving rate had fallen from 5.3 per cent of household disposable income to 4.6 per cent. Indeed, this was the fifth successive quarterly fall from a rate of 7 per cent in March 2016.

It's undeniable that we won't get back to truly healthy economic growth until we see a return to wages growing in real terms. And it's hard to know how long this will take.

Without doubt, weak wage growth is the biggest cloud on our economic horizon.

But the story on the decline in our rate of saving isn't as dire as the figures imply. Saving is calculated as a residual (household income minus consumer spending), meaning any mismeasurement of either income or spending - or both - means the estimate of saving is wrong, and likely to be revised as more accurate figures come to hand.

This time three months ago, for instance, we were told that for consumer spending to grow by 0.5 per cent in the March quarter, it was necessary for the saving rate to fall from 5.1 per cent to 4.7 per cent.

Huh? Obviously, the March-quarter saving rate has since been revised up 0.6 percentage points. How? By the bureau finding more household income. (The saving rate was revised up by lesser amounts in each of the previous six quarters.)

And it won't be surprising to see it happen again. We know that, according to the wage price index, average hourly rates of pay rose by 1.9 per cent over the year to June, whereas this week's national accounts tell us average earnings per hour fell by 0.8 per cent.

It's quite possible for the national accounts measure to show less growth than the wage index if employment is growing in low-paid jobs but declining in high-paid jobs, but it's hard to believe such a "change in composition" would be sufficient to explain so wide a disparity.

Moral: don't drop your bundle just yet.

A second line of negativity we've heard this week says much of the rest of the June quarter's growth came only from increased spending by governments, with government consumption contributing 0.2 percentage points and capital spending contributing 0.6 points.

Two points. First, increased spending on public infrastructure is no bad thing and, indeed, is exactly the budgetary support for stimulatory monetary policy (low interest rates) the Reserve Bank has long been calling for.

Second, the transfer of the new, private sector-built Royal Adelaide Hospital to the South Australian government during the quarter had the effect of overstating public investment for the quarter and understating business investment.

Looking at the adjusted figures for business investment, we find the good news that non-mining investment spending grew by (an upwardly revised) 2.1 per cent in the March quarter and 2.3 per cent in the latest quarter, to be up 6.1 per cent over the year to June.

That says the long-awaited recovery of business investment in the non-mining economy (the other 92 per cent) is well under way. It's also good to know that the long, growth-reducing decline in mining investment isn't far from ending.

Growth in home-building activity was negligible during the June quarter, although Treasurer Scott Morrison says there's a "solid pipeline of dwelling construction" remaining.

The volume of exports of goods and services rose by 2.7 per cent during the quarter, offset by a rise of 1.2 per cent in the volume of imports, implying a net contribution to growth of 0.3 percentage points in the quarter.

However, this was more than countered by a negative contribution of 0.6 percentage points from a fall in inventories, mainly a rundown of the grain stockpile. (That is, grain produced in an earlier quarter was exported in the latest quarter.)

Rural export volumes rose by 18.7 per cent over the year to June. Exports of services were also strong, having averaged annual growth of more than 7 per cent over the past three years, driven by exports of education and tourism.

So, overall, economic growth in the June quarter was a mixed picture which, following a contraction of 0.4 per cent in September quarter last year and - also weather-related - weak growth of 0.3 per cent in March quarter this year, amounted to growth of just 1.8 per cent over the year to June.

This is artificially low, but the September quarter should see us bounce up to artificially high annual growth of about 3 per cent, as last September quarter's minus 0.4 per cent drops out of the calculation.

If you want more persuasive support for our more optimistic mood, however, don't forget employment grew by a super-strong 214,000 in just the first seven months of this year – with 93 per cent of those jobs full-time – and leading indicators showing more jobs strength to come, plus surveys of business conditions showing them at their best in almost a decade.

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How we delude ourselves about the cost of living

Let me tell you a home truth no politician would dare to: We don't have a problem with the cost of living. In fact, consumer prices rose at the unusually slow pace of just 1.9 per cent over the year to June.

I don't expect that telling you you're kidding yourself will make me popular – which, of course, is why the pollies aren't game to tell you, even though they know it's true.

But how on earth can I claim there's no problem with the cost of living when, in this column only last week, I wrote that the retail cost of electricity had more than doubled over the past decade, and was now rising by a further 15 or 20 per cent?

Because electricity bills do not the cost of living make.

Households have to buy a hundred other things apart from power, and it's changes in the combined cost of all those things that determine what's happening to the cost of living.

Trouble is, humans are not good at keeping track of what's happening to all the prices of the 101 things we buy.

We tend to focus hard on some price changes, while ignoring loads of others. Which ones do we focus on? The ones that are rising rapidly, of course.

Which ones do we ignore? The ones that don't change much. We even fail to notice or remember for long the prices that are falling.

Nothing's better suited to misleading us than bills for water, gas or electricity. They tend to come only once a quarter, which makes them a large dollar figure.

When they're a lot higher this quarter than they were last – and when we struggle to find the money to pay them – we're left convinced the cost of living is out of control.

Actually, it says we could be better at budgeting – could hold more spare cash aside for unexpected bills. But it's easier for us to shift the blame to someone else – the gov'ment, for instance.

All this subjectivity is why we get a reasonably realistic picture of changes in the cost of living only by accepting what we're told by the people whose job it is to keep a careful record of price changes, the Australian Bureau Statistics, with its consumer price index.

The index measures changes in the prices of a fixed basket of goods and services bought by households in the eight capital cities. The bureau conducts a detailed survey every six years to ensure the items in the basket reflect changes in our purchasing habits.

The basket includes 87 different classes of expenditure, covering – as we'll see – far more than just the things we buy in supermarkets. The bureau checks about 100,000 individual prices every quarter, across the eight capitals, mainly by having its workers go into shops to see for themselves, or by contacting service providers.

It tries to get the actual prices people are paying, and to adjust for changes in quality and quantity (such as when a producer reduces the size of a tin or package without reducing the price commensurately).

The index confirms that, over the decade to June, the price of electricity rose by 116 per cent, while the combined price of all the goods and services in the basket rose by just 26 per cent.

How is that possible? Because most prices rose by far less than electricity did, some prices actually fell, and – get this – electricity accounts for less than 2 per cent of the cost of all the many things we buy. (For age pensioners, it's 3.4 per cent.)

Let's look closely at that 1.9 per cent rise in consumer prices over the year to June. It includes a 7.8 per cent rise in electricity prices.

But food prices (accounting for 17 per cent of the total cost of the basket) rose 1.9 per cent, alcohol and tobacco prices by 5.9 per cent, clothing and footwear prices fell by 1.9 per cent, housing costs rose 2.4 per cent, while prices for furnishings and household equipment and services were unchanged.

Out-of-pocket health costs rose 3.8 per cent, transport costs rose 2.1 per cent, communication costs (mainly phones) fell 3.8 per cent, recreation costs (mainly audio, visual and computer costs) fell 0.1 per cent, education costs (mainly private school and uni fees) rose 3.3 per cent, and the cost of insurance and financial services rose 2.1 per cent.

This means prices fell for categories worth 17 per cent of the total cost of the basket and were unchanged for a category worth 9 per cent of the basket.

The truth so many people can't see is not that the cost of living – consumer prices – has been rising rapidly, but that wages are only just keeping up with prices.

Over the four years to March, consumer prices rose by 8.3 per cent, whereas the index for wage rates rose by an unusually weak 9.2 per cent.

What's really making us dissatisfied is not that the cost of living is rising rapidly, but that our wages haven't been rising by the 1 per cent or so per year faster than prices that we're used to, thus preventing us from increasing our standard of living.

That is, our ability to buy a bit more stuff than we bought last year.

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We've slowed a lot, but we're not about to go backwards

There's no denying the economy has slowed down, by far more than we were expecting. But don't conclude it's likely to subside into recession any time soon.

This week's national accounts for the March quarter, from the Australian Bureau of Statistics, show real gross domestic product grew by a pathetic 0.3 per cent during the quarter, and by just 1.7 per cent over the year to March. This compares with its "potential" annual growth rate of 2.75 per cent.

This time last year, the government's budget forecast was for growth averaging 2.5 per cent in the financial year just ending, accelerating to 3 per cent in the coming year.

So what's gone wrong? And why is it unlikely get a lot worse?

First point: don't think the economy's running down like a battery-powered toy. Looking back over the past four quarters, we see OK growth of 0.7 per cent in the June quarter of last year, then a contraction of 0.4 per cent, then super-strong growth of 1.1 per cent and now weak growth of 0.3 per cent.

This unnatural, saw-tooth pattern says some transactions may have been recognised in the wrong quarter. For instance, investment spending by federal and state public corporations leapt by 37.8 per cent in the December quarter, but then contracted by 20.9 per cent in the March quarter.

Neither figure should be taken literally.

Two major drivers of activity at present are home building and exports of coal and iron ore. Both have been disrupted by unusual weather that's not been smoothed away by normal seasonal adjustment. Climate change?

Home building has been growing strongly for several years, but it contracted by 1.2 per cent in September quarter and by 4.4 per cent in the March quarter. Most of this is explained by unusually wet weather in some parts of the country.

The volume (quantity) of exports was up 2 per cent in the June quarter, then slowed to growth of 1.4 per cent, then leapt by 3.7 per cent and now has actually fallen by 1.6 per cent.

Much of this volatility is explained by extreme weather disrupting shipping carrying coal from Queensland or iron ore from Western Australia.

We could expect the figures for the present quarter to be boosted by a catch-up from the weak March quarter – were it not for the further disruption in April and May we know has been caused by Cyclone Debbie.

Note that a sudden build-up in business inventories contributed 0.4 percentage points to growth in the March quarter. Much of this was a jump in mining industry stockpiles, suggesting a lot of coal was produced, but couldn't be shipped.

But to explain much of the quarter-to-quarter volatility in GDP growth in terms of misallocation and wild weather doesn't alter the fact that, when you add up the four quarters, you get only to utterly weak annual growth of 1.7 per cent.

One major component of growth that's unlikely to be affected by either factor is consumer spending. It's been unusually weak in all quarters bar December, growing by a pathetic 1.3 per cent over the year to March.

And this despite households cutting back their rate of saving from 6.9 per cent of household income to 4.7 per cent over the year.

This weakness in consumption ain't hard to explain: growth in household income has been held back by weak growth in employment and, more particularly, negligible growth in real wages, notwithstanding a 1.2 per cent improvement in the productivity of labour over the year.

Real labour costs per unit – a measure of the race between real wages and labour productivity – fell 1.7 per cent in the quarter and 6.3 per cent over the year to March.

Wanna know why the economy's growth is so weak? You won't find a more powerful explanation than that.

Remember, however, that the weakness isn't spread equally across the country.

State final demand is a poor substitute for gross state product, but the best we get each quarter. Across the whole economy, domestic final demand also grew by 1.7 per cent over the year to March.

But state final demand grew by 4.5 per cent in Victoria, 3.3 per cent in South Australia and Tassie, an above-par 1.9 per cent in NSW, and a below-par 1.6 per cent in Queensland.

Now get this: in Western Australia, final demand contracted by 6.6 per cent. So the West is still bearing the brunt of the bust in the mining construction boom. This explains a fair bit of the weakness in the national average.

The West's contraction in the March quarter was just 0.2 per cent, however, suggesting the inevitable end to its contraction phase isn't far off. That's the first reason things won't continue weakening nationwide.

As part of that, the long-running fall in mining investment spending must also be within a few quarters of ending. You need to be good at arithmetic to see that, when our focus is on rates of growth, "the removal of a negative is a positive".

The housing construction boom has a few more quarters to run, and strong grow in infrastructure spending is in the pipeline.

But much depends on what happens to real wages. Certainly, the government's forecast of economic growth returning to our potential growth rate of 2.75 per cent in 2017-18 as a whole, rests heavily on a resumption of real growth in wages.

To the extent the present weakness in wage growth is merely cyclical, wages will recover soon enough. This is hardly the wildly optimistic expectation that some, who've forgotten the economy moves in cycles, have claimed.

But to the presently unknown extent that the weakness in wage growth has deeper, structural causes, we won't get back to a decent rate of growth until the government acts to fix the problem.

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The news is good, but not for the reason we've been told

Fabulous news on the economy this week. The recession that never was, didn't happen. Phew. That's a relief.

After going backwards by 0.5 per cent in the September quarter of last year, we learnt from the Bureau of Statistics' national accounts that the economy rebounded by 1.1 per cent in the December quarter - meaning, according to the overexcited children of economic reporting, that we've escaped "technical" recession.

Actually, anyone with sense knew three months ago we would. The detail of the national accounts showed the contraction was no more than a pothole on the economic road, the product of an unusual accumulation of negative one-offs.

But even if this week's figures had shown a second consecutive quarter of "negative growth", the recession the excitables would be shouting about would be technical rather than real.

Why? Because you can't have a real recession without falling employment and rising unemployment, and we've had neither. Oh. No one told me.

But back to reality. Just as the economy didn't really contract in the September quarter so, however, the economy didn't really take off like a rocket in the December quarter.

There's a lot of largely inexplicable "noise" in the initial estimates of the quarter-to-quarter change in real gross domestic product. That's why adult economists never take the figures too literally.

It's common for a literally unbelievably bad quarterly figure to be followed by an unbelievably good one.

That's partly because of catch-up – work that couldn't be done in the first quarter because of, say, bad weather, is caught up with in the second.

But also because of the laws of arithmetic. If we compare the December quarter with the weak September quarter, we get an increase of 1.1 per cent. But compare it with the quarter before that and the increase is only 0.6 per cent.

The rate of real GDP growth over the year to December – 2.4 per cent – is closer to the rate at which we're likely to actually be travelling, but even that may be on the light side.

One suspiciously strong aspect of the accounts in the December quarter was growth in consumer spending of 0.9 per cent.

With the rise in wages so small, and only modest growth in employment, household disposable (that is, after-tax) income grew by only 0.2 per cent in nominal terms.

So how could consumer spending have grown so strongly? Since, by definition, income equals consumption plus saving, the statisticians assume households must have reduced their rate of saving.

The national accounts show the household saving ratio peaking at almost 10 per cent of household disposable income at the end of 2011, then falling almost continuously since then, taking a big drop in the December quarter to reach a little over 5 per cent.

If that's really happened and isn't just the product of some misestimate of income or consumption (or both), it's probably explained by a "wealth effect" – people in Melbourne and Sydney, seeing the value of their homes shooting up, feel wealthier and so decide they don't need to save as much and can spend more.

The next bit of apparent good news is that new business investment spending grew by almost 2 per cent. This, believe it or not, included an increase in mining investment, plus a stronger-than-usual increase in non-mining investment.

The former is likely to be just a blip as mining investment continues to fall back to normal, post-boom levels; the latter is an encouraging sign that the rest of business is getting on with the rest of their lives.

The last bit of good news in the accounts is that our terms of trade – the prices we receive for our exports compared with the prices we pay for our imports – improved by 9 per cent during the quarter, taking the improvement for the year to almost 16 per cent.

This is mainly because, after falling sharply since their peak 2011, coal and iron ore prices rose over most of last year.

This is important for several reasons. An improvement in our terms of trade increases our real income – since the same quantity of our exports now buys an increased quantity of imports.

"Real net national disposable income per person" – a better measure of living standards than real GDP per person – increased  2.5 per cent in the quarter to be 5.3 per cent higher over the year.

Many people noticed that company profits (the profits share of GDP) leapt by 16.5 per cent in nominal terms during the quarter, whereas the nation's wages bill (the wages share of GDP) fell by a nominal 0.5 per cent.

Why the disparity? Mainly because of the huge boost to mining company profits from the jump in export prices.

Not to worry. If the economy works the way the textbook says, this gain to miners should flow through the economy, causing higher wages and higher tax payments.

This latter likelihood is shown in the fact that nominal (as opposed to real) GDP grew 3 per cent in the quarter to be 6.1 per cent higher through the year.

This is great news for the Treasurer because we pay taxes (and everything else) in nominal dollars, not real dollars.

Last word goes to Dr Shane Oliver, of AMP Capital, who says there are seven reasons to be upbeat about the outlook for the economy.

"Thanks to a more flexible economy, Australia is on track to take out the Netherlands for the longest period without a recession. South-east Australia is continuing to perform well.

"The great mining investment unwind is near the bottom. The surge in resource export volumes has more to go.

"National income is rising again. Public investment is strong and there are signs of life in non-mining investment. Growth is on track to return to near 3 per cent this year," Oliver concludes.

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Cut in penalty rates another win for 'bizonomics'

When we look at all the crazy behaviour in the United States, we comfort ourselves that it couldn't happen here. Well, last week we took another step in that direction.

Why do blue-collar workers get so alienated and fed up they vote for someone as mad as Donald Trump? It couldn't be because, while America has waxed fat over the past 30 years, their pay has been stagnant in real terms.

How have the top few per cent of US households captured most of the economic growth for three decades?

Three main reasons, which apply in varying degrees to us.

First, because globalisation and "skill-biased" technological change have produced a small number of winners and a large number of losers.

Second, because far from using the tax-and-transfers system to require the winners to compensate the losers, we've gone the other way, making the income-tax scale less progressive and tightening up on payment of benefits to people of working age.

Third, because although the economy has changed in ways that weaken organised labour, we've doubled down, weakening legislative arrangements designed to reduce the imbalance in bargaining power between bosses and workers.

The unions have been weakened by the greater ease with which employers can move their operations overseas and by the technology-driven shift from goods to services.

The legislative attack has focused on removing union privileges, weakening workers' rights and weakening workers' bargaining power by discouraging collective bargaining and favouring individual contracts.

In the US there's been a failure to raise minimum wage rates. Here, there's been a decades-long campaign to eliminate penalty rates for people working "unsociable" hours which, supposedly, are anachronistic.

The mentality that produced these developments is "bizonomics" – something that sounds like economics because it repeats buzzwords such as "growth" and "jobs", but isn't.

In Australia, micro-economic reform has degenerated into a form of rent-seeking that's saying the way to a prosperous economy is to keep business – the people who create the jobs – as happy as possible.

This bizonomics isn't new, of course, as attested by its slogan: What's good for General Motors is good for America.

As it relates to the labour market, the proposition is that the way to make things better for everyone is to make life tougher for the workers.

Pay them less, give them less job security in the name of greater "flexibility", acquiesce to business's ambition of making working life a 24-hour, seven-days-a-week affair, and we'll all be better off.

The flaws in that argument – and the price to be paid for playing this game for decades – are now more apparent.

For a start, the number of workers and their dependents far outnumbers the bosses and owners and their dependents. So if all you end up doing is transferring income from the workers to the bosses, far more people lose than gain.

Of course, that's never what we're promised. The promise is always that the loss to existing workers is justified by the gain to all the would-be workers who'll now get a job.

Trouble is, too often you end up with a lot of workers making a sacrifice with only a handful of would-be workers finding jobs.

The Fair Work Commission's decision to cut Sunday and public holiday penalty rates for workers in hospitality and retail is an experiment in trickle-down economics, based on faith rather than evidence.

That makes it like everything else on big business's "reform" agenda: the immediate benefits come directly to business – in the form of cheaper labour – but, not to worry, those benefits will trickle down to the rest of us, so in the end it will all be much better for everyone.

Do you wonder why the punters don't believe it and conclude simply that "the government" has cut wage rates to benefit its big business mates, thus adding to their disillusionment and willingness to vote for populist fringe parties?

As I've explained before, the claim that lower penalty rates in retailing will lead to growth and jobs is – like the argument for protection – based on a fallacy of composition and the absence of "economy-wide" thinking.

The most likely effect is that total consumer spending remains little changed, but more of it's done on Sundays and goes on recreation and retail.

Plus an apartheid weekend, where the high-paid still get it, but the poor have to work.

A fearless prediction: now business has got some of the "reform" it's seeking, no one will ever bother to come back in a few years' time and do a proper study to check whether all the promises we were given came to pass.

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Why the economy is growing faster

So, the shock, horror economic news of the week was something good. The national accounts showed the economy grew a lot more strongly during the last part of last year than anyone was expecting.

Whereas economists – both on the official and the market side – were expecting growth in real gross domestic product of 0.4 per cent or less during the December quarter, leading to growth of 2.5 per cent for the year, the Australian Bureau of Statistics came up with figures of 0.6 per cent and (thanks to upward revision of growth in the September quarter) 3.0 per cent for the year.

Why? Because the statisticians found stronger growth in consumer spending – particularly spending on services – than people were expecting, as well as stronger exports of services.

In other words, our domestic economy – indeed, not just our internal economy but the household sector of our economy – is a bigger part of our destiny than many imagine.

It should be a lesson to those who assume that problems in other economies immediately translate to problems in our economy.

Or that problems in financial markets – particularly the sharemarket – immediately translate to problems in the "real" economy inhabited by you and me. That once the bad news starts, all the news is bad.

The lesson holds even though this week's news relates mainly to a period that began five months ago and ended two months ago, whereas the bad news about China and the sharemarket and all the rest came in the new year.

The first conclusion to draw from this week's accounts is that, if we enjoy a long period of exceptionally low interest rates and a significant fall in the value of our dollar, these forms of stimulus will eventually get the economy growing faster.

The second conclusion is that, thanks to the help of low interest rates and a low dollar, the economy's transition from mining-led growth to growth in the rest of the economy is proceeding satisfactorily.

The national accounts showed business investment spending falling by 3.3 per cent in the December quarter and by 10.1 per cent over the year, with most of that explained by the sharp drop-off in mining and natural gas construction.

On the other side of the transition, the first effect of low interest rates was to encourage a surge in the buying and selling of existing houses, leading to a rise in the prices of those houses and the building of a lot of additional houses.

Spending on building new homes and altering existing ones grew by 2.2 per cent in the quarter and by 9.8 per cent over the year.

Consumer spending grew by 0.8 per cent in the quarter (following upwardly revised growth of 0.9 per cent in the September quarter) to show healthy growth of 2.9 per cent over the year.

Explaining this isn't easy. Let's turn to the "household income account" - which means we switch from quoting real (inflation-adjusted) changes to quoting nominal changes.

We know that household income wouldn't have been growing too strongly because, although a lot more people got jobs in the December quarter, wage growth has been very low. Household income grew by just 0.4 per cent in the quarter.

And household disposable income grew by less than 0.1 per cent, mainly because payments of income tax grew by 1.2 per cent in the quarter.

And yet consumer spending grew by a remarkably strong 1.2 per cent during the quarter (that figure's nominal, remember).

How was this possible? It happened not because households "dipped into their savings" as was mistakenly reported, but because they chose to reduce the amount of what they saved from the quarter's disposable income.

According to the accounts, the nation's households reduced their saving during the quarter by $2.9 billion, dropping it to $19.5 billion. This means the net household saving ratio fell from 8.7 per cent of household disposable income to 7.6 per cent.

Remember that the estimate of household saving is calculated as a residual (income minus consumption), so it can be distorted by any errors in the other items in the sum.

It's not hard to believe the rate of saving has fallen, because for the past four years it's been edging down from its post-financial crisis peak of 11.1 per cent at the end of 2011.

Even so, last quarter's drop of more than 1 percentage point seems very big, about double the size of the biggest previous quarterly falls. It may be revised to a smaller drop.

The best explanation for households' falling rate of saving is that people are less worried about their debts and about keeping their jobs, with rapidly rising house prices in most cities leading them to feel wealthier than they were.

The decline in the rate of saving as house prices rise is pretty convincing evidence of a "wealth effect" helping to bolster consumer spending at a time when household income isn't growing strongly.

And the wealth effect coming via house prices helps tie the strength of consumer spending back to the period of low interest rates and its ability to stimulate spending in different ways.

The news of faster growth in production also fits with the already-known strong growth in jobs – particularly in the later part of last year – and modest fall in the rate of unemployment.

It makes the good news we've been getting on the labour market easier to believe because it's now more consistent with the story we've been getting from the national accounts.

Annual real GDP growth of 3 per cent is a fraction higher than the economy's newly re-estimated trend or "potential" growth rate of 2.75 per cent. And this above-trend growth is what's usually required to have the unemployment rate falling – as it has been.

Of course, whether growth stays at or a little above trend this year isn't guaranteed.

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How digital disruption allows higher prices

Do you think much about the process involved when you decide to buy something some seller is offering you? If you're like most consumers, probably not. But the businesses doing the selling do, which ought to be a warning.

And the study of exchange – the buying and selling of goods and services – is the central element of economics. Economists long ago concluded they had it all figured.

Trouble is, the digital revolution is changing the way sellers behave when we buy things online or use the internet to check out the choice before deciding what to buy.

These hidden changes are revealed in the eye-opening book, All You Can Pay, by former Fairfax Media journalist Anna Bernasek and her husband, D. T. Mongan.

None of us wants to pay more than we have to to buy the things we decide we need. But the great insight of economists is that we'd often be prepared to pay more for something we want than we're required to.

The difference between what we're willing to pay and what we actually have to is known to economists as the "consumer surplus". It's a measure of how much better off the purchase has left us.
The more successful competition is in holding down the market price, the greater is our consumer surplus and thus the more we've gained from living in a market economy.

By the same token, sellers are often able to sell their wares for a higher price than the minimum at which they'd be willing to sell. This difference is the "producer surplus". The smaller the producer surplus, the more competition in the market is advancing the interests of consumers.

It's obvious that producers would like their surplus to be as great as possible. The history of the modern market economy is the story of how businesses have discovered ways of increasing that surplus even while competition between them has been working to keep it small.

For most of the past century we lived in the era of mass-produced consumer goods, as epitomised by Henry Ford. He invented the production line as a way of more fully exploiting economies of scale and keeping the price of his cars as low as possible.

The lower the price, he reasoned, the more people who could afford a car. And the more cars he sold, the higher his profits. To keep costs and prices low he produced just one kind of car, in one colour, black.

But, as Bernasek and Mongan record, Ford was eventually overtaken by General Motors, pursuing a different strategy of selling a range of models at differing prices, aimed at different segments of the market. GM even started changing each model slightly every year.

This "product differentiation" involved selling more than just a car: style, fashionability, social status, even self-expression. From an economist's perspective, however, it was about gaining the freedom to charge a higher price, making the "market price" harder to discern, reducing consumer surplus and increasing producer surplus.

If each consumer has their own price they're willing to pay, the ideal from a profit-maximising producer's perspective is to charge each individual a price that matches their willingness to pay. That some people would pay a price much lower than others are paying won't matter provided you're getting as much as you can out of each of them.

Trouble is, how do you know how much a person is willing to pay? You don't. But for years many businesses have practiced various forms of "price discrimination" involving charging broad categories of customers higher prices than others.

Cinemas, for instance, charge adults more than children. Airlines charge business travellers more than holidaying families. They do this not out of the goodness of their hearts, but to maximise their producer surplus.

But this is where the online revolution is making it a lot easier for sellers to assess the willingness to pay of particular customers. The more information they have on file about you – your age, sex, address, occupation and record of previous purchases – the more accurately they can estimate how much they can get away with charging you.

The authors explain that the trend to "customisation" is actually a way of asking you to disclose more about what you're looking for, giving the seller greater control over what you're offered and at what price.

Chain stores' loyalty cards are primarily a way of gathering information about your buying habits and preferences. If I know you invariably buy brand X, I know I don't need to offer you a lower price.

These days, prices are often framed as discount off what's purported to be the usual price. But how do you know the price wasn't bumped up before it was discounted? And how do you know the discount you're being offered isn't lower than others are getting?

Most of us still do only some of our shopping online rather than in stores, so it's early days for the trends Bernasek and Mongan see emerging.

But it's not hard to believe it's getting ever easier for businesses to convert consumer surplus to producer surplus by charging us more than they used to.

The more prices become personalised, the harder it becomes to know the actual market price – even the average price – customers are paying. If that day dawns, the benefits of living in a market economy will be greatly reduced.

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Contrary to reports, economy battles on

Joe Hockey is right. The economic news is hardly wonderful, but the media's attempt this week to convince us the economy was perilously close to recession was sensationalist nonsense.

What set them off was news from the Australian Bureau of Statistics' national accounts that real gross domestic product grew by just 0.2 per cent in the June quarter. What they forgot to mention was that in the previous quarter it had grown by 0.9 per cent.

As Hockey says, the figures "bounce from quarter to quarter". But why let that small fact get in the way of a good scare story?

The less excitable Dr Chris Caton, of BT Investment Management, put it another way: "The weak growth for the June quarter was in part payback for the strong growth in the March quarter."

Just so. We were told, for example, that spending on home building fell by 1.1 per cent in the latest quarter, but not reminded that the previous quarter it had grown by a remarkable 5.6 per cent. There is no reason to believe the housing construction boom has ended.

We were told that the volume of exports fell by 3.3 per cent in the latest quarter, but not reminded that in the previous quarter it had grown by 3.7 per cent. Turns out the weather was unusually favourable around bulk-commodity ports in the first quarter, but unusually bad in the second.

We weren't told about these one-off negatives for growth in the June quarter, but much was made of a one-off positive: a sudden surge in defence spending, we were told, fully accounted for the quarter's 0.2 per cent growth.

(Actually, it was worse than that. Whereas total public sector spending made no contribution to overall growth in the March quarter, it contributed 0.6 percentage points in the June quarter.)

All this is why searchers after truth rather than headlines don't take quarterly changes in GDP too literally. Combine the two quarters and you get average quarterly growth of 0.55 per cent, or annualised growth of 2.2 per cent - which is probably closer to the truth.

It also fits better with a fact we were told only in passing, that the economy grew by 2 per cent over the year to June and by 2.4 per cent on average over the financial year, meaning Treasury's forecast of 2½ per cent was near enough to right - a point Hockey kept making and the media kept ignoring.

Examine the figures for the year to June and you don't find much evidence of an economy likely to collapse in a heap. Consumer spending grew by 2.5 per cent, home building by 10.4 per cent, public sector spending by 3.3 per cent.

Export volumes grew by 4.5 per cent, while import volumes fell by 0.7 per cent. In fact, apart from a small fall in the level of inventories, the only major negative contribution to growth came from business investment spending, which fell by 4.1 per cent.

That fall comes from the end of the mining construction boom, of course. It's a reminder of the truth of our position - that our transition from mining-led growth to more normal sources of growth has been far from smooth and isn't achieved yet - a truth too prosaic for the headline chasers. Growth in the low 2s is clearly well below average.

But if you dig a bit deeper you do find signs that the transition is proceeding, with help from record low interest rates and an ever-lower dollar.

For a start, there is evidence of recovery in non-mining investment. According to rough figuring by Kieran Davies, of Barclays bank, it's up by 4 per cent over the year to June, led by investment in the services sector.

Exports of services - including tourism and education - are also growing. Though little changed in the June quarter, their volume was up 7 per cent over the year, Davies says.

"With imports of services down 8 per cent over the past year as the falling exchange rate has made it more expensive to take an overseas holiday, trade in services [exports minus imports] added 0.1 percentage points to GDP in the June quarter and 0.6 percentage points over the past year."

Much has been made of the 1.2 per cent fall in "real net national disposable income per person", rightly described as the best measure of material living standards the national accounts provide. It's fallen for five quarters in a row.

Why? Because of the deterioration in our terms of trade - the prices we receive for our exports relative to the prices we pay for our imports - as coal and iron ore prices have fallen.

But it's important to see this in context. Why do so many people care so much about economic growth? I (and Joe and his boss) think it's mainly because they want to see more jobs created.

If so, real GDP - the quantity of goods and services workers are employed to produce - is a more relevant indicator than the various measures of "real income".

And the growth in GDP we've had has been sufficient to create 240,000 jobs over the year to July (including 68,000 during the supposedly knackered June quarter) and to stabilise the unemployment rate at just over 6 per cent.

It's true that the size of our real income has an effect on our spending on goods and services, and the demand for goods and services affects employers' demand for workers.

But much of the loss of income caused by lower coal and iron ore prices is borne by the mining companies (which are about 80 per cent foreign owned) and by state and federal governments (which collect lower mining royalties and company tax), rather than by the rest of us.

Times aren't easy, but we're not in bundle-dropping territory.

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Why monetary policy still packs a punch

Perhaps the biggest question in macro-economic management today is whether monetary policy has lost most of its power to get the economy moving. To many of us the answer seems obvious. But this week a Reserve Bank heavy popped up to challenge the newly emerging consensus.

Whether you look at the way the major developed countries' resort to massive "quantitative easing" (creating money) hasn't exactly got their economies booming, or at the way our big cuts in the official interest rate haven't seen us return even to average ("trend") growth, it makes you doubt if "monetary policy" - the manipulation of monetary conditions - still packs a punch.

Consider our story. The Reserve Bank began cutting the official interest rate as long ago as November 2011. By August 2013 it had reduced it by 2.25 percentage points to a historic low of 2.5 pc. This year it's made more cuts to 2 per cent.

And yet the economy continues growing below trend and isn't expected to return to healthy growth before 2016-17.

Enter Dr Christopher Kent, an assistant governor of the Reserve. In his speech this week he didn't deny the facts: interest rates have been very low for a long time without there being any noticeable pick-up in growth.

But he did dispute the conclusion that this meant monetary policy had lost its power to stimulate economic growth. His point is that when we look at the position in the way I've just done, we're implicitly assuming "ceteris paribus" - that all else remained equal while the only thing that changed was the level of the official interest rate.

Obviously, a lot of other things changed over the period. To take just the most obvious examples, the big fall in coal and iron ore prices, the movement in the dollar and the impact of "fiscal policy" - the effects of the federal and state budgets.

To try to take account of all the things that change, not just interest rates, you need to use a sophisticated econometric model of the economy. And when Kent's people at the Reserve do this, their estimates "tentatively suggest that the overall effect of monetary policy has not changed significantly in recent years".

Such models have two kinds of variables "exogenous" and "endogenous". Exogenous variables are set by the modeller, whereas endogenous variables are determined by the model and its assumptions about how the economy works.

Kent says that in modelling work using a "dynamic stochastic general equilibrium" model (don't ask), estimates of the endogenous relationships based on the figures up to 2008 (the time of the global financial crisis) are about the same as estimates based on figures since then.

"This suggests that the period of below-trend growth in gross domestic product over the past few years may not reflect a change in the monetary policy transmission mechanism," he says.

"Rather, the model attributes below-trend growth to sizeable exogenous forces or shocks. The sharp fall in commodity prices has played an important role of late. Also, weakness in private investment - beyond that which can be explained by subdued domestic demand and falling commodity prices - has made a sizeable contribution to below-trend growth."

I think here he's alluding to the adverse effect on business investment of the still-too-high dollar.

"The model also suggests that consumption growth has been a bit weaker than in the past," he says.

Measuring the effects of monetary policy in isolation from other changes that may be happening at the time, this modelling tells us that a cut in the official interest rate of 1 percentage point will lead the level of real GDP to be between about 0.5 per cent and 0.75 per cent higher than it otherwise would be in two years' time.

It will also lead the level of prices to rise by a bit less than 0.25 percentage points a year more than otherwise over the next two to three years.

Of course, one part of the economy that has strengthened in response to low interest rates is housing construction. It's up by about 9 per cent over the past year.

Kent says housing is typically the most interest-rate sensitive sector and its response to date is "broadly consistent with historical experience".

Consumer spending, however, has so far been "a bit weaker over recent years than suggested by historical experience".

But much of that history captures the unusual period, from the early 1990s to the mid-2000s, of adjustment to the easier access to housing credit permitted by the deregulation of the banks and to the economy's return to low inflation.

In that period, household debt increased substantially and household saving fell to rates much below earlier norms. This allow households' consumption spending to grow faster than their incomes.

Since then, however, households' behaviour has reverted to its earlier norms, with a higher rate of saving and greater emphasis on repaying mortgages as early as possible.

If you ignore the growth in borrowing for investment property, but take account of the rising balances in mortgage offset accounts, the rest of household debt has fallen by 4 percentage points of annual household disposable income since early 2000.

Kent thinks many households are using the lower rates to repay their mortgages more quickly (rather than to borrow and spend more) and that some retired households are responding to their lower interest income by limiting their consumption.

As for non-mining business investment, businesses will start expanding their activities when they're closer to running out of spare production capacity. Business investment doesn't usually lead, it follows.

Kent concludes that monetary policy is working pretty much the way it always has, but is pushing against "some strong headwinds", including the huge fall-off in mining investment, tightening budgets at state and federal level and an exchange rate that's still higher than you'd expect it to be considering how far export prices have fallen.

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A far from wonderful set of growth numbers

The economy may have grown faster last quarter than business economists were expecting, but that tells you more about their forecasting ability than the economy's strength. Despite what Joe Hockey says, the numbers weren't all that wonderful.

According to the national accounts released by Bureau of Statistics this week, real gross domestic product grew by 0.9 per cent in the March quarter and by 2.3 per cent over the year to March.

This, of course, is well below the economy's "trend" (long-term average) rate of growth of 3 per cent a year, the rate needed just to hold unemployment steady in an economy with a growing number of people wanting to work.

But that's just the first reason the figures aren't as good as they initially appear. Another - one economists perpetually forget to remind us about - is that we have a population growing at the rapid rate of about 1.5 per cent a year, thanks to high immigration.

So we need quite a bit of growth just to stop average income per person falling. Turns out real GDP per person grew by just 0.8 per cent over the year to March.

Another thing to remember is that the growth in real GDP - the quantity of goods and services produced in Australia - is just one way, the most common way, of measuring economic activity.

It's usually assumed that the growth in the nation's production is the same as the growth in its income. But, first, the assumption breaks down if there's a significant change in Australia's terms of trade - in the prices we're getting for our exports relative to those we're paying for our imports.

That's because changes in our terms of trade affect the international purchasing power of the nation's income. When our terms of trade improve, the goods and services we produce are worth more when we buy goods and services overseas; when our terms of trade deteriorate, the stuff we produce is worth less when we're paying for imports.

With the prices we received for our mineral and energy exports rising greatly in the years before their peak in 2011, our "real gross domestic income" grew a lot faster than our production, real GDP.

Now, however, with coal and iron ore prices falling sharply, our real gross domestic income is growing much more slowly than our production, even falling. In the March quarter, real GDP grew by 0.9 per cent, while real GDI grew by only 0.2 per cent.

Over the year to March, real GDP grew by 2.3 per cent, but real GDI fell by 0.2 per cent. This matters because the real value of our income has an indirect effect on future real GDP, which is what drives growth in employment.

But a second assumption implicit in our almost exclusive focus on real GDP is that all the goods and services produced in Oz belong to Australians. They don't. In particular, maybe as much as 80 per cent of the value of the minerals and energy we produce and export is essentially the property of the foreign owners of our mining companies.

The Bureau of Stats highlights gross domestic product in conformity with international convention. But the fact is we'd be better off using gross national product, which measures how much of GDP actually stays with us rather than going to foreigners in interest and dividend payments.

And, because the deterioration in our terms of trade arises mainly because of the fall in prices of mineral exports, real GDI overstates the fall in our income. Real gross national income grew by 0.4 per cent in the quarter, and by 0.6 per cent over the year to March.

But, turning back to real GDP and its components, another reason the figures aren't as good as they appear is their heavy reliance on growth in exports. The volume (quantity) of our exports grew by 5 per cent in the quarter and by 8.1 per cent over the year to March.

This means exports contributed 1.7 percentage points to our overall growth of 2.3 per cent for the year. That's almost three-quarters of it.

Normally, this wouldn't be a worry. But when you remember that most of the export growth came from mining, and that mining is highly capital-intensive, you see there is a worry. It means that real GDP growth of 2.3 per cent isn't contributing as much to employment growth as we usually assume.

The figures show that the Reserve Bank's efforts to stimulate growth in the "non-mining" economy are having mixed success. They're working well with investment in new housing, which grew by 4.7 per cent in the quarter and 9.2 per cent over the year.

But they're getting nowhere with encouraging non-mining business investment to offset the sharp fall in mining investment. Overall, business investment fell by 2.7 per cent in the quarter and by 5.4 per cent over the year.

And get this: fiscal policy (including the budgets of the state governments) is hindering, not helping. Public investment in infrastructure fell by 2.4 per cent, its fifth successive quarterly decline, to be down by 9.1 per cent over the year, which subtracted 0.4 percentage points from overall growth over the year.

Consumer spending grew by an improved, but still below-trend, 2.6 per cent over the year, despite weak growth in wages and employment, and a rising tax bite from household disposable income.

What's keeping consumption reasonably strong is a falling rate of household saving. It fell from 8.8 per cent of household disposable income to 8.3 per cent in the quarter, down from 9.6 per cent a year ago.

It's normal and rational for households to adjust their saving to smooth their consumption spending as the economy moves through the ups and downs of the business cycle.

Even so, it's yet another respect in which the numbers weren't all that wonderful.

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