It's a recession, despite GDP ?surprise'

PORTFOLIO POINT: An ABS format change spared Australia some red ink, but doesn’t alter the fact we are in recession and it will get worse.

The 0.4% improvement in March quarter GDP changes very little. In particular, it doesn't change the fact that on any sensible definition Australia is in recession. Nor, more to the point, does it change my view that things will get worse.

The surprise was due to the Australian Bureau of Statistics changing the way it tracks bulk commodity prices. Usually the bureau waits for the major contracts to be settled, and factors in the price changes in the June quarter (because the contract prices are set from April 1). This week it announced that it was actually factoring in lower prices in the March quarter. Factoring in a lower price implied a higher volume for exports, which lifted GDP. Consequently, net exports added 1.4 percentage points to growth in the quarter.

Forget this statistical jiggery-pokery: the key numbers to focus on are national income and domestic demand. Australia's boom was not a GDP boom, it was a national income and domestic demand boom. The latest GDP figures confirm that the boom is busting. Gross national spending fell by 1.0% in the March quarter, following a 1.3% fall in the December quarter. Real gross domestic income fell by 1.2% in both quarters.

These are the variables that drive domestic profits, employment and the Reserve Bank. The weakness points to further job losses. Continuing increases in unemployment will keep the pressure on the Reserve Bank to keep cutting rates. I still think that the cash rate target will be lowered to 2%.

A couple of follow-on points

First, the most important thing about exports is total receipts. It doesn't really matter whether it is prices or volumes that are driving the aggregate. This week's report confirmed that the global bust is finally having an impact. Last year, despite the “great recession”, Australia's mining exports kept booming:

Second, the recession is starting to affect consumers. Last year it was a painless recession: household income boomed, seeing the fastest rise since 1974. Now, real incomes are starting to feel the pinch. That income strength underpinned better consumer spending in the March quarter, but I doubt that spending will sustained its early-2009 momentum for much longer.

Finally, as I keep reminding clients, I will be wrong unless I see significant job losses. This weeks data is consistent with job losses to come.

Gerard Minack is chief market strategist of Morgan Stanley Australia.