Dial-a-GDP?

Wayne Swan has a bounce in his step after the latest GDP figure and the usual round of gloating by economic commentators (who 'predicted' it) is in full force. (As an aside - if you mention the possibility of something have you really predicted it?) In amongst the 'I told you so's' Glenn Stevens and the RBA are being criticized for not having predicted the strong March quarter growth (4.3% - our economy is overheating).

But is it really as simple as the RBA just getting it wrong, reducing rates when it was completely unnecessary? (Just as they had rate settings too high in the past)

I can't help but think back to my time in the US, with Alan Greenspan at the helm of the Fed. I used to find it astonishing that the US was such a leveraged economy (and the culture so supportive of credit based consumption) that the Fed could literally dial up demand through its monetary policy settings.

Tough month for the market or bad quarter for GDP? No problem. Knock a bit off the average home loan interest rate and away we go again. Of course that ended in disaster. The need for higher yield amongst the saving community generated huge demand for AAA rated garbage, which ultimately blew up in their faces.

Back to Australia. Glenn and his buddies at the RBA might be copping a pasting but, rather than being a bunch of dopes who couldn't predict flooding after 6 feet of rain, could it be that they are actually a key driver for GDP changes?

I don't profess to be an expert on GDP or Government statistics generally (although I do have a healthy skepticism of them). And I haven't researched this topic in depth. In other words, I might have it completely wrong.

It just strikes me as too simplistic that the RBA has all their forecasting wrong, loosening monetary policy at exactly the time they should be tightening. Could the answer be that, rather than missing the boat on GDP, the RBA are actually contributing to GDP changes? (The same way Greenspan used to dial up GDP through his monetary settings). Western Australia and the mining sector are still going strong - so that's part of the story. But there must be something else.

The chart below shows the quarterly change in the RBA Cash Rate vs the quarterly change in GDP over the last few years. It certainly looks like GDP has made a habit of bouncing shortly after the RBA has loosened its purse. One possibility is the RBA is getting it hopelessly wrong. The other is that they are having a strong and immediate influence on GDP.

This theory happens to fit nicely with the declining savings rate over the last couple of quarters. It is also a common failing of statistics - they don't measure what was avoided. If a well resourced police department manages to keep the crime rate low, people start wondering why so many of their taxes are paying for police rather than everyone patting themselves on the back for a job well done.

If the RBA are doing their job, this could be good news for income investors. A couple of good quarters of GDP growth may require the RBA to reverse its current downward focus and get the cash rate back on a tighter setting. Although let's not take this to the bank just yet. Glenn Stevens still seems to be in a rather gloomy mood.