An inconvenient GDP truth

Crikey

Ouch. There hasn't been as inconvenient a piece of news for doomsayers since the economy failed to go into recession in 2009. Rumours of the slide in the Australian economy were exposed this morning by the best quarterly growth figures since Labor got into office: ABS figures show the economy grew by a solid 1.3 per cent in the quarter, vastly faster than even the most optimistic of market forecasts of about 0.6 per cent, and on an annual basis, by 4.3 per cent in the 12 months to March, again much faster than 3.3 per cent market forecasts.

Remember, this is historical data – it's for the first three months to the end of March. It covers a period when retail sales grew better than many forecasts had expected, but came despite a surge in the current account deficit that cut GDP growth by 0.5 per cent (it was a negative 0.3 per cent in the December quarter). It also came despite the weakening in commodity prices (such as iron ore), the sharp fall in mining company profits in the quarter and weaker demand in some sectors of the domestic economy. The annual rate is well above the trend rate for the economy of 3.25 per cent. Trend GDP growth in the year to March was 3.6 per cent.

The ABS also revised its figures for all of 2011 from 2.3 per cent to 2.5 per cent. The December quarter figure of 0.4 per cent was lifted to 0.6 per cent growth and September was boosted to 1 per cent from the revised 0.8 per cent in the December accounts. The June quarter remained unchanged at 1.4 per cent. The March, 2011 quarter which saw the impact of the Queensland floods, was changed to a negative 0.5 per cent, compared to the previous 0.9 per cent and the original minus 1.2 per cent.

That is, while we were flagellating ourselves last year about the impact of the natural disasters – and yes they did have an impact – the economy was performing better than we thought. And as a consequence, suddenly our employment performance starts to make a lot more sense.

Not unexpectedly, the main industry contributors to GDP were mining (up 2.3 per cent), financial and insurance services (up 1.7 per cent) and professional, scientific and technical services (up 2.8 per cent), each contributing 0.2 percentage points to the increase in GDP. But it wasn't just the mining investment boom that helped the economy grow much faster in the quarter. Non-farm GDP rose by 1.2 per cent, which points to more buoyant conditions in the domestic economy than many people realise.

Real domestic income edged up 0.2 per cent, despite a 4.3 per cent slide in the terms of trade in the quarter as commodity prices fell faster than the fall in the value of the Australian dollar. The fall in the March quarter in our terms of trade followed a revised 5.8 per cent drop in the December quarter (4.7 per cent originally). Because of the fall in our terms of trade, there was no growth in real net national disposable income over the quarter. That left it up 4 per cent over the year to March, a bit under the 4.3 per cent rise in GDP.

The ABS said that in seasonally adjusted terms the main contributors to expenditure on GDP were household final consumption expenditure (up a very solid 0.9 percentage points) and private gross fixed capital formation (0.8 percentage points. That's the investment boom), with net exports detracting 0.5 percentage points. Home building, which we know is in a deep hole, also detracted 0.1 per cent from GDP.

Household savings continued at their recent very high level. The ABS said the rate was 9.3 per cent in the quarter, up from 9 per cent in the December quarter, but down slightly from the 10.1 per cent in the three months to last September.

Does the data mean the RBA was too pessimistic yesterday when it cut rates? No – apart from the historical nature of the data, remember the RBA cut rates because of concerns about the international situation and a benign inflation outlook. But the bank had forecast 2012 growth about 3 per cent in its May Monetary Policy Statement. That will now be revised (unless Europe goes bad).

But the data will rule out any further rate cuts because the domestic economy continues to grow, despite its undoubted patchiness in sectors such as department store retailing and home building. The only rate cuts we will now get over the rest of this year will be if Greece or Spain produce a crisis in the eurozone, which crunches world markets in a repeat of late 2008 after Lehman Brothers collapsed. The GDP data makes forecasts by the likes of Westpac chief economist Bill Evans, for more rate cuts this year, look a little optimistic at best.

That means no more good news on rates for Treasurer Wayne Swan, but he'll be delighted with today's figures. They reinforce the government's story about the economy and the rationale for, and the capacity to reach, a budget surplus, even if there remain concerns a softening international outlook will lead to falls in tax revenue next financial year.

As for Tony Abbott and Joe Hockey, their response to yesterday's RBA cut was to say that it reflected a soft economy caused by poor economic management. Swan might now be awfully tempted to invoke the old footy expression: look at the scoreboard, fellas. Australia's annual growth pace of 4.3 per cent compares with 1.9 per cent in the US in the March quarter, zero to negative growth in the eurozone; a 0.1 per cent contraction in the UK and 2.7 per cent growth in Japan. China's growth was 8.1 per cent (down from 9.2 per cent at the end of 2011) and India's 5.3, down from just over 7 per cent at the end of 2011.

This story first appeared on www.crikey.com.au on June 6. Republished with permission.