The Australian economy expanded by an extraordinary 1.3 per cent in the first quarter of 2012 in seasonally-adjusted terms, smashing consensus expectations of a 0.6 per cent rise (with Goldman Sachs at just 0.2 per cent). Only one forecaster, ANZ, got anywhere close to the number with a 1 per cent guess. The fourth quarter GDP results have been revised up from a weak 0.4 per cent to a relatively more normal 0.6 per cent.
The annual year-on-year rate of economic growth in Australia was a way above trend 4.3 per cent in the March quarter versus the 3.3 per cent expected by economists. This is truly incredible. On the basis of the ABS national accounts data, the droves of analysts who claimed Australia was growing at a "sub-trend" or "modest" pace, including the RBA, were way wrong. Despite the very high Australian dollar, the economy has been booming. Crucially, this also includes consumer spending.
One of the most important drivers of Australia's above-trend economic growth over the last year has been household consumption. In seasonally-adjusted real terms, household consumption rose by a stonking 1.6 per cent in the March quarter alone, and by 4.2 per cent on a year-on-year basis. Household consumption is now running significantly above the 3.6 per cent per annum long-term average since 1959.
Importantly, the GDP data reconciles with the stubbornly strong labour market data – at least as it has been reported thus far (we wait for an update tomorrow, which is expected to be weak).
The RBA has evidently cut rates three times when it didn't need to. On the basis of this information, the RBA's "insurance" rate cuts in December last year and May and June this year were totally unnecessary. As I have regularly argued here, the harangued Australian central bank has been doling out free "insurance" when it did not need to, and has punished hard-working Australian savers in preference to less prudent borrowers. Of course, it has been happy days if you have had a variable rate mortgage, as more than 90 per cent of residential borrowers do!
Yesterday I wrote that if I were running the RBA I would not have cut in December, would have only cut once in May, and would not have cut in June. I have been a fairly lonely voice in arguing that there was no need to slash rates, and that RBA risks over-engineering policy. And that domestic growth was not in desperate need of interest rate support as so many analysts claimed.
Expect to see boatloads of spin explaining Australia's official economic growth data. It is a profound embarrassment for the many doomsayers who have incorrectly misled us to believe that Australia was experiencing a household spending recession, that the economy was on the brink of collapse, and that only ultra low interest rates held out hope for saving our bacon.
Perhaps most significantly, today's economic growth data, combined with the labour market data over the last 12 months, proves once and for all that the RBA's monetary policy settings over 2010 and prior to November 2011 were spot-on.
Indeed, it suggests that the RBA's rate cuts since November 2011 may prove to be one of the central bank's worst policy-making mistakes.
Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark. The author may have an economic interest in any of the items discussed in this article.
This article first appeared on Property Observer on June 6. Republished with permission.