I mentioned yesterday in my Scoreboard column that Australia’s first quarter growth would probably be closer to 0.5 per cent compared to the consensus forecast of 0.8 per cent – and that’s pretty much what we got. Unfortunately we’ve also seen the usual bout of hysteria that accompanies softer data. Indeed a quick scan of the newspapers this morning sees many senior commentators talking about a recession or downturn.
That’s not my read of the data though and this kind of alarmist commentary from commentators and economists has no basis in fact. One of the most important things readers need to consider when they read this commentary is that it has been with us pretty much since 2009 – through strong and soft data. But it was wrong in 2009, it was wrong again in 2010, 2011 and 2012. I think it’s a good bet this same dreary commentary is wrong again in 2013.
For mine, overall growth still looks pretty good – slightly below trend on the headline but that’s due to the volatility of the components rather than any structural changes. Indeed, I don’t think there is anything to really change the characterisation of the economy broadly at trend. Especially when you consider that the 0.6 per cent growth rate we saw in the March quarter, is really only slightly below the average of 0.7 per cent since 2000. I ask you, is that anything to panic over? Anything to justify the ridiculous commentary we are seeing across the board? No. Otherwise, for more serious readers of the economy there are three key observations I would make.
1. For a start, changes in inventories have taken nearly a full percentage point off growth over the last two quarters. That is, if not for large detraction from inventories, GDP growth would be closer to 3.5 per cent than 2.5 per cent – and the thing is over time inventories neither add nor subtract to growth, it’s just noise.
2. Similarly we’ve seen some distortions created from large second hand asset sales, and of course we saw the first fall in engineering construction since 2010. Just like in 2010 this doesn’t signal the end of the investment boom, mining investment is extremely lumpy it bounces around. We otherwise know there is still a gigantic pipeline of work to come through that has been committed to and will not be pulled – delayed perhaps, but not pulled.
3. One genuine concern I do have is that there is clear evidence that the Reserve Bank’s easing cycle and the campaign to weaken the Australian dollar more broadly, has dampened growth. You can see this most clearly with regard to consumer spending. Spending rose 0.6 per cent in the quarter, this is okay, don’t get me wrong, but it’s not great and it is well below the rates recorded before the Reserve Bank started to cut.
Recall that fear mongering over the end to the mining boom in the second half of last year – just after the Reserve panicked and slashed rates 75 bps over two meetings? Growth in consumer spending plummeted after that, falling to an average growth of 0.4 per cent over the last three quarters from an average of 0.9 per cent before the Reserve Bank started cutting. The impact is clear. Lower rates normally lead to higher spending a year on and higher confidence – we haven’t seen this. In this instance we can’t even point to events abroad. All the panic over a ‘grexit’ and US double dip and the like has subsided. The global story is markedly better now. There is only one culprit - the Reserve Bank’s easing cycle and the misleading rhetoric used to justify these cuts and a weaker Australian dollar. Further evidence comes via non-mining investment, which is still very weak despite the 200 bps of cuts that we’ve had.
For policy, and despite the near hysteria of many business commentators and economists, the numbers are irrelevant. We’ve got the usual gaggle stating that the numbers mean the Reserve Bank has to slash rates some more, panicking everyone further with the ongoing recession call and not seeing the inconsistencies of their own analysis – 200 bps worth of cuts and growth has softened one year later when it should have picked up. The key message to these economists is that the price of money is not the problem, and monetary policy isn’t having the effect they think it should – and that because it’s destroying confidence. So still lower rates are not the answer any way you look at it. It’s just dumb to argue for more. Anyway, the truth is another cut would have been in store even if the numbers had been strong. Recall this is what we saw through 2011 and 2012. We had above trend economic growth and the Reserve Bank still cut. The Australian dollar is the target here and the Reserve Bank board signaled they are still not happy with its level – more cuts will come no matter what, and this is not for the good of the country.