THE DISTILLERY: Growth enigma

Jotters try to understand how yesterday's GDP figure came to be, while others read economic signposts in Ten's capital raising.

What do we make of the latest set of national accounts? On the one hand, the stronger than expected mining activity and consumer spending numbers mean the low unemployment rate no longer looks out of place. On the other hand, the numbers are radically, and inexplicably, different from the previous quarter. Additionally, they don’t appear to fit the Reserve Bank’s assessment of the economy, which has inspired interest rate cuts totalling 75 basis points in the last two months – minus what the banks took. Best of luck boys and girls!

Firstly, The Age’s Malcolm Maiden is wisely humble before the statistics and argues we should welcome them with few apologies.

"Governor, you and your colleagues were right, and have been all year. There's growing concern about the global outlook as Europe's debt crisis simmers, but Australia stands like a lighthouse in the storm. It will take a full-blown global debacle to knock it down. Even allowing for the fact that sentiment has nose-dived since the national accounts were ruled off, there's no way to get from the March quarter result – growth of 1.6 per cent, and growth of 4.3 per cent in a year – to anything like the slump that anecdotal reports from swaths of the economy have been implying. Wayne Swan, you were right, too. Australia is on course to achieve a budget surplus in 2012-13, as your May budget predicted. And while the economic growth numbers are not a complete game-changer for the markets, they certainly move the goal posts. The next rate cut is further away than previously thought.”

Highlighting that the Reserve Bank was justified in its positive assessment of the Australian economy in the lead up to big rate cuts is awkward. It’s something that The Australian’s David Uren kind of argues in his piece this morning. But you take Maiden’s point, particularly when the RBA knew the banks would fatten their margins – something The Sydney Morning Herald’s Ian Verrender claims hinders the big four’s medium-term outlook.

But leading those who’ve been arguing with the bears, Business Spectator’s Adam Carr relishes the moment.

"Household consumption, the ‘weak or cautious consumer’, provided half the lift in demand growth this quarter. Consumer spending too is above trend – it’s been at or above trend for the last year, by the way. All the while drivelling fools have been telling us how weak spending was. That the data is somewhat dated is true, but to bleat that fact as if it in some way detracts from the economy’s strength, says more about the intelligence of those saying it than anything. The data shows us that the economy had considerable momentum into this easing cycle and that rate cuts were not needed. This is a fact – the economy was accelerating all through 2011 and now, through the March quarter of 2012, it is well above trend. Look at the way the momentum is going. I would suggest this dated data gives a much more reliable picture of the economy and its trajectory than the persistently incorrect forecasts of economic weakness.”

However, The Age’s economics editor Tim Colebatch believes the numbers, which will probably be revised in some way, "strain credulity”. When you consider the radical differences from one quarter to the next, he has a point.

"These are just first estimates. The bigger the first one, the more likely it is to be revised. For June 2010, the first growth estimate was 1.2 per cent; that now reads as 0.6 per cent. Just a year ago, GDP was estimated to have fallen 1.2 per cent in the March quarter: that fall is now just 0.5 per cent. Suppose the figures are right: what do they tell us that we didn't know? Quite a lot. They show an economy firing on two engines: mining investment and consumer spending. We knew about the first, and is it firing! Engineering construction, 5 per cent of the economy, now generates half its growth.”

The Australian Financial Review’s veteran economics editor Alan Mitchell is similarly sceptical that the numbers truly reflect reality, whether it’s the March quarter or the December quarter.

"For example, the biggest contributor to the strong real growth in household consumption in the March quarter growth was spending on food. In the past spending on food for home consumption was strangely weak; now it is surprisingly strong. Neither rings completely true. Another surprise is the absence of any price pressures in the economy. We knew consumer price inflation was weak. But what about engineering construction, which is at the epicentre of the mining boom and grew by 20 per cent in the March quarter and 53 per cent over the past year? According to the national accounts, there are no price pressures there either. The cost of engineering construction has grown by only 2.2 per cent in the past year. Can you believe that? I don’t. At the same time, the growth of employee compensation in the national accounts is twice as strong as the wages growth. Part of the difference is the changing composition of the work force: there are now relatively more high-paid mining jobs, and relatively fewer low-paid manufacturing and retailing jobs. Another part of the difference may be the growth of non-wage compensation. But neither of those factors seems to explain the entire difference. Only a surge in productivity growth kept labour cost pressures down.”

Mitchell’s perspective is, in The Distillery’s view, the most honest of all this morning’s commentaries. If you make the case that these numbers feel too strong – a reasonable instinct – you must cast similar doubt on the apparent "weakness” of the quarter before it. This means the economy wasn’t as weak as we’d previously thought, but equally also not as strong as these numbers – that Treasurer Wayne Swan is dining out on – suggest.

Regardless, these figures have big political ramifications. The Age’s Michelle Grattan suggests that they could provide the government with some much-needed cover as the carbon price comes into effect on July 1. Perhaps consequently, The Sydney Morning Herald’s Phillip Coorey says shadow treasurer Joe Hockey "hasn’t looked so uncomfortable since Australia last avoided recession” – a great line.

However, The Australian’s Geoff Elliott points to BHP Billiton, which is openly casting more doubt on the timeframe of its Port Hedland expansion, to illustrate how better numbers this quarter mightn’t be found in the next.

Indeed this foreboding dread feeds the other major set of commentaries in the papers this morning.

The bulls claim that the doomsayers have little credible data to back up their claims – as of yesterday they appear to have even less. But Ten Network’s decision to raise capital shows that corporate Australia is willing to put money aside in case credit markets seize up – although this is a separate issue to Australia’s fundamental economic health.

The Age’s Adele Ferguson says Ten’s raising "speaks volumes” about tightening credit markets when combined with a similar move by pallet maker Brambles. Business Spectator’s Stephen Bartholomeusz points out the crucial difference between the two companies; Brambles has a strong business with more than $1 billion in earnings – Ten doesn’t.

With reference to the Ten raising, The Australian’s John Durie suggests that investment banks hoping for another equity raising boom will be left disappointed this time around, while The Australian Financial Review’s Chanticleer columnist Tony Boyd argues that it won’t do anything to address the network’s structural issues. Although on the positive side, The Sydney Morning Herald’s Elizabeth Knight suggests that it could tilt the dynamics of the EYE Corp sale in Ten’s favour.

Still in the category of cautious global economic commentaries, The Age’s Eric Johnston reports that foreign investors have been picking up almost 80 per cent of Australian government bonds, indicating just how much our country is seen as a safe haven.

Confused by all this? The Age’s Michael West makes the case, citing former Goldman Sachs whizz kid turned super-bear newsletter writer Raoul Pal, that the heightened sense of fear makes sense when you notice the historically easy access to contrarian (usually very negative) economic commentaries.

In other company news, Fairfax’s Insider columnist Ian McIlwraith thinks paint company DuluxGroup might have to dig deeper to win garage door manufacturer Alesco Corporation after the target beat its revised profit guidance.

And finally, The Australian’s Asia Pacific editor Rowan Callick reveals our prehistoric attitudes towards engagement with Asia.