For all the talk of income deficits and recessions, empty growth, export-driven growth and booms, and a growth ”mirage” to quote some of the media descriptions of the March quarter National Accounts from the Bureau of Statistics this week, the report was full of surprisingly good news.
First up, believe it or not, but our first quarter growth rate of 1.1% was as strong as China’s was as reported in April.
And can anyone remember that Australia’s economic growth rate has risen to the fastest rate in four years, as global growth has slowed – which is what has happened in the past year?
The current IMF forecast for 2016 is 3.2%, down from 3.4% in January. Global growth in 2015 was 3.1%, Australia’s was 2.8% (restated from the original 3.0%).
The annual rate to March was Australia’s strongest annual growth in four years (3.1%) and was achieved with minimal Federal government stimulation from the budget, but a lot of aid from more forward looking Labor and Coalition governments in Victoria and NSW who have both kick started heavy infrastructure spending (which are jobs generators) programs that will last for years.
That’s why NSW and Victoria are doing better than other states, helped by booming apartment construction. Yesterday’s retail sales data for April confirmed that with NSW (5%) and Victoria (4.3%) leading the way in sales growth over the past year.
But the solid economic growth has been achieved with a corporate tax rate of 30%, with Fair Work Australia overseeing industrial relations (and an absence of the ABCC, the trigger for this boring election).
Fiscal policy has (except in NSW and Victoria) been conspicuous by its absence, and the economy has been run for much of the past four years by the Reserve Bank and its inflation target of 2% to 3% over time.
In fact the RBA has been the one true constant for the economy, business, employers and employees. Its two rate cuts in 2015 now look to have been spot on, helping spark an upturn in jobs growth and demand in the economy in the last half of 2015 and into early 2016, all without sparking a wages or inflation surge.
Those commentators who argue about the softness of the figures and the weakness of demand miss a very important point – that economies never fire on all cylinders at once, and nor do regions. Remember the two speed economy at the height of the investment boom – booming WA and Queensland?
Now they are slowing and the economy’s transition is booting Victoria and NSW, helped by solid government spending and budget surpluses thanks to the house price surge)
And now there’s the new two speed economy – booming NSW and Victoria – and weak Queensland and NSW. That was written up with barely an acknowledgement of the previous two-speed claims.
We have had income recessions, weak exports, weak investment – all true and all a function of changing global circumstances and especially in the economies of our major trading partners, such as China.
Australia has withstood a whacking from plunging export prices – our terms of trade fell 11.5% in the year to March and a 26% fall in the past two years – and a plunge in iron ore prices to $US38 or so a tonne late last December.
Oil prices have fallen, along with LNG prices, copper and coal are weak, only gold is doing well. Except for beef and wool rural commodities, especially grains, are also suffering from weak global prices and high stocks. More pain could lie ahead this year from weak commodity prices.
But the weaker Australian dollar has helped offset the full impact of the collapse in our terms of trade, softening the blow and providing a cushion.
And for the past 18 months, has been doing so without boosting inflation – in fact disinflation remains our biggest policy challenge, along with weak wage growth, especially for the RBA, which is why it cut rates earlier this year.
Productivity has improved as real unit labour costs have remained virtually steady for the past four years. Non-mining business investment is re-emerging – the recent private capex data for the March quarter showed higher planned spending from manufacturing and service sector industries than a year ago and in the first estimate for 2016-17 issued in February.
It is not a big increase, but it’s there,in black and white. In fact the economy has not only survived a 26% plunge in our terms of trade in the past couple of years, but a similar-sized drop in mining investment. Both have been major dislocations to growth and demand and national income (and why national income has fallen).
The economy has also survived two and a half years of the dollar over parity ($US1) with the greenback (from November 2010 to May 2013). Since December 2008 we have had only two quarters of negative growth (December 2008 and the March quarter of 2011 when the original fall of 1.2% was reported. It is now a contraction of just 0.2%).
The housing/apartment building boom – engineered by interest rate cuts and income hungry banks and others – has been the major support fir the economy’s transition, along with the boom in prices of existing homes.
But like all booms, that also contains a couple of threats to future growth from a possible slow down in demand for apartments, and/or a slide in prices.
But house prices have regained rising in Sydney and Melbourne and if they don’t ease soon, the RBA and its co-regulator, APRA will be forced into taking action.
And household debt remains very high and a potential weight on the economy if for whatever reason, our growth phase should stumble. The apartment construction boom contains within it the seeds of a potentially nasty bust if buying dries up and prices plunge.
But offsetting the high household debt is low interest rates, and the two years or more of mortgagees building up surpluses in their bank accounts as they pay off their home loans faster than they have to.
But as the Prime Minister and Treasurer cling to the GDP figures, there are a couple of problems they (or the ALP) will have to confront post July 2 – weak nominal GDP growth – it was 2.1% in the year to March, up from 1.8% in the 2014-15 year, but still well short of the budget target of 2.5% and 5% next year.
And iron ore prices fell under $US49 a tonne overnight under $US48 well under the $US55 estimate the budget was based on. But offsetting that and other commodity price falls has been the drop in the value of the dollar – from the 77 US cent level in the budget to around 72.20 cents on Friday morning.
As always the currency is playing the major role in helping the economy adjust and softening the blow of price and demand changes. But once again the resilience in the economy has surprised on the upside.
