SCOREBOARD: Confidence measure

Local confidence is grim but multiple Reserve Bank speeches this week should reveal much about real economic conditions.

This week there isn’t much in the way of economic data for Australia, but there is plenty of material from the Reserve Bank of Australia – it actually kicks off this afternoon with a speech from the RBA Governor Glenn Stevens at 1600 AEDT. The topic will be something I think we’ll all be interested in and that is 'economic conditions and prospects'.

The mood is certainly grim in Australia and last week we saw both consumer and business confidence take a turn for the worst. Regular readers will know I think this is largely unjustified and based on a misperception of current conditions and prospects. In my opinion the view that the economy is still growing at trend is the correct one, and obviously I’ll be interested to see whether the RBA still thinks this following the fourth quarter national accounts.

Recall that headline GDP was weak at 0.4 per cent and if you look at the annual rate of GDP growth, currently at 2.3 per cent, you could be forgiven if you took only a casual glance, for thinking that the economy was growing at a sub-trend pace. Average annual growth is something more like 3.25 per cent. So there are plenty of people quoting that figure in order to argue that economic momentum is weak. This isn’t quite accurate, though. In fact we’ve got the same problem here that the US has had at various stages when analysts were arguing US growth is weak.

That is, our imports are growing at a blistering pace such that net exports have taken, on average, 0.6 percentage points off growth per quarter – which is three times the average. Imports themselves have averaged growth of over 3 per cent per quarter which is quite something when the average is more like 2 per cent. The thing is, strong import growth cannot be used to argue that economic momentum is weak. That doesn’t make any sense. So look at domestic demand which is what domestic consumers, business and government spend. Yes, it was quite soft in the fourth quarter at 0.2 per cent. But that follows a spike in the third quarter of 2.2 per cent which was the strongest growth in four years.

The next question is whether the fourth quarter figures represent a change in momentum. Well, there is no evidence of that and without a catalyst this is highly unlikely. The thing is, numbers bounce around, so a lot of that difference is just volatility in business investment, but there is also quite a bit of volatility in the consumer space. To be sensible about things then, you’d average out the two quarters and smooth out some of that volatility. What do you get? Average growth of 1.2 per cent per quarter. That’s good growth for the second half of 2011 which is a bit of an acceleration over the first half of 2011 – it’s just above trend. That’s why the unemployment rate is still very low.

For mine it’s pretty straightforward then, but we’ll have to wait till this afternoon to see what the RBA makes of it all. Prospects are, needless to say in my opinion, fantastic and you only need to look over at the acceleration in US growth to see why some of the pessimism here is probably unwarranted.

Outside of today’s speech we see the RBA’s minutes (Tuesday 1130 AEDT), then the RBA’s assistant governor of the financial system, Malcolm Edey, speaks on Tuesday at 1400 AEDT and another assistant governor, Guy Debelle, speaks on Thursday at 0910 AEDT. There is no major data.

The global data flow doesn’t appear that heavy either. There are a few bits and pieces for New Zealand, we get the performance of services index today at 0830 AEDT, then we see the current account on Wednesday at 0830 AEDT followed by credit card spending at 1300 AEDT. The main event will be the fourth quarter GDP figures where the market expects a rise of 0.6 per cent for the quarter and I’m not too far off that.

For the US, we see housing starts Tuesday night, existing home sales Wednesday night, house prices Thursday and on Friday there is pretty much nothing. That’s in addition to the usual weekly indicators (mortgage applications on Wednesday and initial jobless claims on Thursday). There is also some Fed speak though. Bernanke gives a lecture on Tuesday and Thursday night, While the Fed’s central banking conference starts on Friday.

Elsewhere, it’s worth watching European construction output thought, and then German producer prices tomorrow. UK CPI is also out tomorrow night. On Wednesday we see the BoE’s minutes, while Thursday the major release for Europe are industrial orders, the March PMIs.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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