Despite the surprisingly solid growth figures, we are not out of the woods yet.
The trade figures for April, released yesterday, tells us that the sluggish conditions will be with us for a while
Bears still lurk, recession remains in the air.
The National Accounts said it all: hours of work fell, imports volumes fell, GDP per head of population fell, domestic spending fell as business investment fell, housing fell, unemployment rose and labour costs fell as people worked fewer hours and fewer people worked.
Government tax revenues fell from most sources. Nominal GDP fell (all these are down for a second quarter in a row).
The senior Federal Treasury official, David Gruen told a Senate estimates committee this week:
"Numerical macroeconomic forecasts have been provided in the Budget since the late 1960s,a and this year’s Budget is the first to forecast a recession over that time.
"By recession, we mean a sustained period of either weak growth, or falling real GDP, accompanied by a significant rise in the unemployment rate."
The government might be euphoric, but look to the weak global economy to continue impacting Australia’s export sector (as we saw in the trade figures).
The Reserve Bank Governor, Glenn Stevens was cautious in a speech in Townsville in North Queensland
"It is likely that activity has remained subdued in the June quarter," he said in the speech.
But not before the very subdued level of demand and activity in the domestic economy is overcome.
It’s where the damage was done in the March quarter, but our domestic slowdown caused our appetite for imports to fall (and that was helped by a couple of other things, such as the two stimulus packages and lower interest rates). (See the report on April’s trade performance below.)
It’s where the impact will resonate loudest as the year goes along.
While export volumes continued to hold up well, export prices fell sharply by 9.9% in the quarter.
The April trade figures confirm that and another fall to come.
The terms of trade fell by 7.8% in the quarter – the largest fall since 1974. Export values fell by around $6 billion in the quarter – the third biggest fall on record.
(That’s also because export values rose sharply as did the terms of trade last year.)
One of the effects of the falling terms of trade has been to lower the GDP deflator – the index of prices of goods and services produced in the economy.
The GDP deflator fell by 1.0% in the quarter and nominal GDP fell by 0.6%.
This is the sharpest quarterly contraction in nominal GDP since 1963.
That’s because nominal GDP was boosted very quickly by the rise in our terms of trade in 2007 and 2008 because of the soaring level of commodity prices, led by higher energy, iron ore and coal prices, not to mention record prices for lead, zinc, copper and wheat.
There is still a lot of money floating around from the remnants of the boom.
The weakness in nominal GDP is reflected in weaker incomes and in lower government revenues.
We saw that with the government finance figures for the March quarter with a 11.6% fall in government taxation revenues (for all governments).
And, that’s where the recession shows up and why conditions will be sluggish for a while yet.
Of the other 22 OECD economies that have reported March quarter outcomes, 20 have contracted. G7 economies contracted by an average of 2.2% in the March quarter.
Despite broader weakness in the economy, household consumption spending rose 0.6% in the quarter, contributing 0.3% to quarterly GDP growth.
Crucially, without the government’s stimulus payments, Treasury estimates the Australian economy would have contracted in the March quarter by around 0.2%.
Household consumption has now grown by 0.8% through the past year. By comparison, private consumption in the G7 area (excluding Italy, due to lack of equivalent data) has contracted by 1.4% over the same period.
Public investment recorded a small negative contribution to growth in the quarter, but should pick up in coming quarters as the next phase of the government’s stimulus plans take effect.
The weak and uncertain global outlook saw sharp falls in private investment in the March quarter.
New private machinery and equipment investment fell by 9.5% in the quarter; non-dwelling construction fell by 4.3% (as we saw in last week’s private capex and Construction work figures from the Bureau of Statistics).
Dwelling investment also fell in the quarter by 5.6%. That’s not going to last, thankfully.
A strong rise in housing is in the system as the impact of the first home buyers’ packages and low interest rates flow through to construction activity.
The National Accounts were nicely summed up by the AMP’s senior economist, Robert Cuneen.
This March Real GDP quarter result is likely to prove a brief respite from the recession headwinds.
For the March quarter the source of strength in Real GDP was primarily net exports (+2.2% Real GDP contribution). Household consumption was resilient (+0.6% qoq) given the benefit of lower interest rates and fiscal stimulus while government spending was solid (+0.3% qoq).
Essentially the windfall from "net exports" with a fading commodity boom has allowed Australia to avoid meeting the technical criteria for a "reces
