Hidden risks in the GDP fine print

Annual real GDP growth of 3.1 per cent is, in anyone’s language, respectable. Indeed, if the economy can keep growing at around 3 per cent it will be nearly perfect, close to its long-run trend. Any faster and there will be capacity pressures and rising inflation risks, any slower and there will be rising unemployment and disinflation pressures. All of which is why the 3.1 per cent growth rate for the September quarter is very much a relief.

That said, the specifics in the numbers are a little more disconcerting. In the last two quarters, the annualised rate of GDP growth has been just 2.2 per cent (0.6 or 0.5 per cent respectively) which is well below trend. Cutting through the inevitable volatility in the quarterly results, the average annual rate of GDP growth in the last three years has also been below trend – at around 2.5 per cent.

GDP growth needs to bounce back to 0.8 per cent per quarter for each of the next three quarters if the government’s 3 per cent MYEFO forecast is to be met. It might happen, but the risks are increasing that it might fall short.

Perhaps the greatest shock for the economy – and one that should be unsettling for the RBA as it adjusts monetary policy at a snail’s pace – is the weakness in nominal GDP. Nominal GDP rose just 1.9 per cent in the last year and this weakness feeds into faltering national income and reflects the free-fall underway in the terms of trade. This is one of the weakest annual increases in nominal GDP ever recorded. It is why the economy feels weaker than the real GDP growth rate suggests and it explains why the government may fall short of hitting a budget surplus this year.

In terms of some specifics in the national accounts, the cuts to government spending are coming through with falls in public consumption and investment in the September quarter. Household consumption registered growth of just 0.3 per cent in the September quarter and business investment rose again. Housing investment also recorded a solid rise in a sign that the long overdue housing construction pick-up might be starting to come through. The household saving ratio also remained high at 10.6 per cent of income. There are no huge surprises in the composition of growth.

All up, the national accounts suggests the economy is doing reasonably well but is experiencing a cyclical downturn, driven largely by the weakness in the terms of trade, an issue compounded by the over-valued Australian dollar and monetary policy settings that are still too tight.

Unfortunately the next RBA meeting is two long months away. In the mean time, it is to be hoped that the monetary easings delivered so far provide some support to the economy and that there are signs of an economic uptick from overseas. If not, the RBA will again be cutting interest rates in February.