Things we don’t need to tell you: the economy is very, very painful. The details are reported daily in the news. And while we all know what the truth of the financial climate feels like, it can be very difficult to understand why it’s happening because news reporting uses jargon that makes no sense to normal people. It feels like when experts and commentators explains the details of our economy, how we got here and how we recover, they seem to talk at us, not to us. It’s not our fault – instead of learning about how inflation works in school, we learnt Pythagoras (which I’m still trying to find a use for). So to create some much-needed clarity, we asked two economists to break down four important economic indicators – what they mean and how they’re shaping what young people are experiencing right now.
Hopefully, by the end of this article you’ll feel empowered to sift through all the finance jargon thrown at you during these uncertain times and ahead of the coming Federal Budget!
Jump to: Gross Domestic Product (GDP) – Inflation – Employment Rate – Labour Force Participation Rate – Federal Budget Advice
Gross Domestic Product (GDP)
To understand anything about the situation we’re in, we have to know what the economy, like, is. Dr Leonora Risse, a senior lecturer in economics at the RMIT, is here to walk you through it:
Dr. Risse: “GDP is really one of the key economic indicators because it reflects the overall strength of the economy. It’s sort of a market. If GDP is on the way up it means that you’ve got a level of activity in the economy – people are out spending, they’ve got good job prospects, there’s a level of confidence. Generally, [the activity] comes from job security with people having good jobs and, ideally, good wage growth. Economists and policymaker use it as an overall indicator that reflects the general sentiment and optimism.”
Zee Feed: What happens when GDP is going down?
“GDP growth slowing down is what we mean by a recession. Over time we have these waves, what we call the business cycle. You have periods where GDP accelerates and is quite strong, spurred on by a really strong housing market, for example. Then you often find that can’t be sustained, so that ‘bubble will burst’ and we’ll head downwards into a recession or a contraction.”
What factors influence GDP?
“A big shock to the system – like a pandemic or war or a natural disaster – can flatten GDP unexpectedly. So really what we aim for is for it to be moderate and steady. We don’t want these massive fluctuations either way: if GDP is super strong, that can put a lot of pressure on prices and create inflation. If it’s really weak, that means the economy is slowing down and there are less job prospects. So, when you hear ‘GDP’ the goal is for it to be steady and stable.”
Is GDP a reliable indicator of how ‘good’ things are in Australia?
“GDP doesn’t do a good job of reflecting inequality — poverty, disadvantaged youth, homelessness. We’d expect if GDP is on the way up, then ideally the benefits of that economic growth get shared across all of society, but it’s not guaranteed.
What it doesn’t reflect is the gap between rich and poor, what we call the ‘distribution of income’. So we have to look at other indicators to show how much of the total income is being received by the top 10% or the top 1% of the population. How much is going to the bottom 10%? How many people are living in homelessness or below the poverty line? Those indicators are really important to look at alongside GDP.”
Inflation
Inflation, and its impact on the cozzy livs, is the word on everyone’s lips. There has been a lot of criticism of the Reserve Bank of Australia’s aggressive (and so far, ineffective) attempts to reduce inflation – we’ve written about how the theory of inflation works before, including ways to control it, but for an even more succinct refresher, Amanda Robbins of Equity Economics has got you:
Amanda Robbins: “Inflation is simply the rate at which the price of goods and services rise.”
What drives up inflation?
Amanda highlights three factors currently driving Australia’s too-high inflation. “The pandemic caused a lot of disruption in the availability of goods and services. When there’s fewer things available, they become more expensive — that’s how the pandemic started to push up prices.”
Then when it comes to the cost of producing goods in particular, we’ve experienced some expensive crises. “The various natural disasters we’ve had increased the cost of goods, as everyone seeks to do repairs and do recoveries. But probably the biggest disruption everyone is familiar with is the Russian invasion of Ukraine, which had a major, underestimated, impact on energy prices. We’re also seeing a major expenditure in people’s households budget, or their energy bills.”
What does this mean for us in the day-to-day?
“All around us, we can see prices rising to the point that current inflation is really high (at time of publishing, CPI is 7%). It sounds really technical, but in fact it’s just that everyone’s income is going a little less towards meeting their needs. That’s a cause for concern for anyone who’s on a tight budget – which is a lot of people today.”
Employment Rate
The employment rate is connected to both GDP and inflation. But currently in Australia, Amanda points out it’s not quite playing out the way we might expect it to:
Amanda Robbins: “Unemployment is actually historically low in Australia – we’ve actually done very well coming out of the pandemic, with a record low 3.5% unemployment. That means a lot more people are in work than have been before. But it’s become harder to understand, which is why there are still concerns here.”
Isn’t low unemployment a good thing?
“Normally when there’s lots of people in work you start to see wages rising. Wage increases are how we address inflation, so people can afford price increases. But wages growth hasn’t been living up to the rate of inflation. So while everything is costing a little bit more, people’s wages aren’t matching those increases in costs. Our annual wages growth is around 3.3%, compared to inflation around 7% – you can see how a gap starts to emerge in people’s purchasing power.”
Labour Force Participation Rate
We can’t talk about employment rates without also understanding the labour force participation rate – sounds the same, but the difference is important. It’s a measure of what percentage of the working-age population is actually working. Right now, almost 67% of working age Australians are working (higher than March 2022).
Why does the labour participation rate matter?
Dr Risse: “The unemployment rate only counts people who are actively looking for a job. If you are studying full time, or have had children or caring responsibilities, or maybe you’ve given up looking for a job because you are a bit discouraged… you’re not counted in the unemployment rate.
I always encourage my students to d also look at the labour force participation rate, because that will give you a sense of how many people have stepped out of the workforce like they’ve given up or they’ve got other commitments or responsibilities. Conversely, it also shows you how many people have stepped back in, otherwise you get only one piece of the picture.”
So… what do we do with all of this information?
For final thoughts, we asked Amanda and Leonora about how this information can help us understand whether government measures in the Federal Budget will actually work to improve things for us all. What are we supposed to think when it feels like nothing changes?
Dr Risse: “When we talk about economic indicators, we don’t just care about money and dollars. Underlying all of these statistics – what we really care about – is people’s wellbeing. We care about measuring these statistics because they tell us about quality of life. Do people feel secure and safe and optimistic about life?
So look out wellbeing indicators in the budget. This government has indicated that they’re going to expand their focus beyond just looking at GDP and unemployment and inflation and also look at a broader set of measurements which touch on issues like economic inequality, poverty, environmental issues, gender inequality.”
Amanda Robbins: “I think what’s important when we think about what a Federal Budget is – we want to think about what you can do in these circumstances. Because it’s pretty hard to manage and control cost rises due to a war in Europe and COVID disruptions that have legacy effects on supply chains. The government talk about needing to grow the size of the economy, so that we’re generating more supply [Ed note: therefore, reducing demand and bringing prices down] which also generates more jobs and more income. That’s definitely something we want to do – known as ‘boosting productivity’. With the size of the economy (GDP) growing, wages can hopefully lift too. But the complexity is that wages growth can further drive inflation. We can’t just think about growth, we need must also think about how to manage government spending better and more efficiently to make sure it actually tackles the challenges that people are facing.
“The main thing for young people to do is continue to engage in this discussion around what the future of the economy looks like. Keep asking questions about what happens to housing costs, educational opportunities, employment and wages prospects if we fail to actually address these issues.”
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