Latest figures show why GDP is limited as a measure of wellbeing

If you want to understand the limitations of Gross Domestic Product (GDP) as a measure of wellbeing, then the latest figures for the March quarter are a great example.

The overall picture saw the economy grow by 0.3% for the March quarter and by 2.5% for the last year. This shows slow growth but not as slow as some were predicting.

The war in Iran and the subsequent increase in fuel prices did affect the numbers, but not as much as you might think. This was because the war didn’t start until March, and these figures cover one of the three months that make up the data. Expect a bigger impact next quarter.

There were a couple of big changes.

First, private investment was the biggest contributor to growth. Great, you might think, economists love investment. That means businesses are putting more money into how they produce goods, and that is the best way to increase productivity.

Except, the private investment was mainly driven by data centres. This involves importing expensive computer chips from overseas, sticking them in a building and then having them suck in enormous amounts of electricity and water.

The actual benefit for Australia is very small. Most of the value in this investment goes to buying imported chips, which means all the economic benefit occurs before they arrive in the country.

That’s before we get to the question of whether artificial intelligence (AI) is going to add much to productivity. If we are seeing a massive over-investment in AI – many people think that’s exactly what is happening – then many of these data centres might end up as stranded assets.

The second big factor for the numbers was the biggest detractor from growth: net exports. Net exports are exports (how much we sell overseas) minus imports (how much we buy from overseas).

Exports dropped, mainly in the mining sector. This was because weather conditions (like cyclones) affect mining companies’ ability to ship their products overseas. This might have a big impact on the official GDP figures, but it has a small impact on Australians’ wellbeing.

Most of the benefit from mining comes in the form of the profits the mining companies make. Because most mining companies are foreign-owned, these profits mainly flow overseas. So, the drop in mining profits because they couldn’t export as much stuff doesn’t impact us very much.

At the same time exports were falling, imports were rising. In particular, imports of microchips for all those data centres.

So, the biggest contributor to growth, data centres, and the biggest detractor from growth, mining profits, are both going to have an underwhelming impact on most Australians’ lives.

It highlights that often the GDP figures don’t measure what is really important.

There is one other thing from these numbers that will attract attention, but for all the wrong reasons. That’s the federal, state, and local governments’ contributions to economic growth.

This quarter, it was zero.

Expect to see the Federal Labor Government crow about how it is not adding to demand. Why? Because the opposition has been droning on about how government demand is adding to inflation.

To be clear, the current inflation rate has been largely caused by a supply shock and has nothing to do with excessive demand.

This conversation will obscure a real problem. The economy is slowing, and that should mean an increase in government spending to help speed it up. But the opposite is happening. Government spending is slowing, putting economic growth at further risk.

All this shows the shallow and insipid commentary we have in this country on government spending and inflation, and what dangers having the wrong discussion can create for Australian people.