Recent data shows the economy is poised to shift into a higher gear against growing expectations that the Reserve Bank will cut rates again.
That’s not to say that the June quarter GDP figures out in a few weeks are going to be strong. My expectation is that the GDP figures will be nondescript -- 0.5 per cent or thereabouts. As mining investment unwinds, GDP could even cease to be a reliable indicator of the broader economy. This is because mining investment is such a small component: it’s about 6 per cent of GDP and 2 per cent of the labour market.
If mining investment slumps 30 per cent while the remaining 94 per cent of the economy pumps out growth well above trend at 4 per cent, is the economy strong or weak? Headline figures may not be much more than 2 per cent, but jobs growth will be strong etc.
What matters far more than the June quarter GDP outcome or even the long-expected mining investment slump (when that finally does occur) is confidence. Look at everything that’s weighing on the economy right now. Non-mining business investment is at recessionary levels. We have high rates of consumer savings and subdued credit growth. This is all symptomatic of a confidence crisis. Our policymakers are dominated by it and politicians on both sides are cultivating it, putting spin above the interests of the nation.
Against all that, the rebound we’ve seen in both business and consumer confidence lately is phenomenal. It’s occurred against headlines declaring unemployment at a 12-year high and set to go higher! That we have to slash our wages, that the mining boom is over and a downturn imminent!
It’s a good omen, then, that the long-awaited turn in confidence looks to be underway, even with those headwinds. The implications for the economy are profound. If current trends persist (and there is no reason to think they won’t), then we should see a rapid acceleration in non-mining investment and consumer spending.
That there are few impediments to this upswing ensures that when it does occur, its duration could be lengthy. Debt is not the constraint to growth that some people think. It is high for consumers, but then the cost of servicing debt is low -- at decade-lows for consumers and even better than that for business.
In fact in the corporate sector, balance sheets are pristine. Perhaps more importantly than that, we’re not coming out of either a broad-based housing or business investment glut. There are patches -- apartments in inner city Melbourne, for instance. But on the whole there are few imbalances of that nature to worry about.
The great hilarity is that, if anything, the RBA is set to cut again. Now I’m not endorsing that approach, I think it’s insane -- regular readers will know that I don’t agree with the path that policymakers have chosen. Indeed I find it extraordinary that some of the loudest fearmongers on debt are the strongest advocates of further easing. Lower rates will lead to higher debt; it’s pretty simple.
My disagreement stems from the fact that the underlying economy was always sound, and the slump we saw in confidence from 2011 was largely due to the actions and rhetoric of policymakers and other PR. There was never anything wrong with our economy. If they do hike, then even then, everyone is in agreement -- the tightening cycle will occur over a very long time period and rates are never going back to pre-GFC highs. They can’t.
Even in this low-confidence environment, it’s a testament to how strong our economy actually is that GDP has been growing at an above-trend pace (with the exception of three anomalous quarters of growth) for about three years. The only real difference now is that house prices are surging, bank profits are soaring, as you would expect. With confidence on the mend, there is very little that will change that, and the most likely outcome is that this momentum will build.