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Has the economy bottomed out? GDP data comes with warning

Despite today’s weaker-than-expected GDP data, there’s evidence the economy has bottomed and is now picking up, Glenn Dyer and Bernard Keane write.

Joe Hockey

The Australian economy continued to drift in the three months to September 30, seemingly stuck in a sub-trend growth phase while broader domestic activity continues its adjustment to the ending of the resources investment boom which weighed heavily on GDP in the quarter.

GDP rose a seasonally adjusted 0.6% in the quarter for an annual growth rate of 2.3%. That compares to 0.6% in the June and March quarter and annual growth rates of 2.6% and 2.5% respectively. Trend growth in GDP is now running neck-and-neck with the seasonally adjusted number — indicating if anything there was a slight slowing in the September quarter. The 0.6% rise quarter-on-quarter was actually closer to most forecasts made before the appearance last week of better-than-expected data for construction, and this week private investment, the balance of payments (trade) and company profits.

The Australian Bureau of Statistics said growth for the quarter was driven by the expected 0.7% contribution from net exports and a 0.4% contribution from final consumption expenditure. These increases were partially offset by a -0.5% fall in business inventories, revealed in Monday’s business indicators:

The mining industry drove the growth in the September quarter contributing 0.3 per cent to GDP. The construction, Transport, postal and warehousing, Financial and insurance services, Public administration and safety and Health care and social assistance industries each contributed 0.1 per cent to the increase in GDP.”

The September quarter saw the terms of trade decrease -3.3% to be down 3.6% on a year ago. That’s despite a 8% plus fall in the value of the Aussie dollar in that time. Over the year to September 2013, the ABS said:

Mining (0.8 percentage points), Financial and insurance services (0.4 percentage points) and Health care and social assistance (0.4 percentage points) industries were the largest contributors to total trend growth of 2.3%. Manufacturing, Electricity, gas, water and waste services, Wholesale trade and Taxes less subsidies on products detracted 0.1 percentage points in trend terms.”

Surprisingly, the ABS said the household saving ratio was lifted to 11.1%, seasonally adjusted, in the quarter. The trend estimate for the household saving ratio was 10.7% in the September quarter 2013.

The figures revealed yet another lift in labour productivity, with GDP per hour worked up 0.2% in trend terms and 1.0% through the year; the market sector data was up 0.2% in the quarter and 1.3% through the year. All of that is seemingly good news, but here comes the not-so-good:

In seasonally adjusted terms, during the September quarter, real gross domestic income fell by 0.1%, while the volume measure of GDP increased by 0.6%, the difference reflecting a decrease of 3.3% in the Terms of trade.

(S)easonally adjusted Real net national disposable income fell by 0.6%. Growth over the past 4 quarters was 0.6% compared with 2.3% for GDP. Net exports contributed 0.7 percentage points to GDP growth in the September quarter 2013 while detracted -0.3 percentage points in the June quarter 2013. In the September quarter 2013 Exports of goods and services increased 0.3% and Imports of goods and services fell -3.3%.

On the expenditure side, the increase this quarter (in seasonally adjusted volume terms) was driven by Public gross fixed capital formation (adding 1.3 percentage points), Net Exports (adding 0.7 percentages points) and Final consumption expenditure (adding 0.4 percentage points). These increases were partially offset by the decrease in Private gross fixed capital formation (detracting -1.4 percentage points).”

The big rise in public gross capital formation was due to completed infrastructure projects being transferred to government — it emerged in the government finance stats out Tuesday. The big fall in private gross fixed capital formation is the slowdown in resource and other investment starting to have an impact. The ABS said: “Total private gross fixed capital formation fell 5.7%. This decrease is largely due to a 12.6% fall in Total non–dwelling construction following a 15.5% increase in the June quarter.”

While it’s stating the obvious, remember GDP data is always backwards-looking. There’s some evidence the economy has been picking up lately. Retail sales grew 3.4% in the year to October (on a trend basis), but in the past three months have been growing at an annual rate of close to 5%. And while the current retail sales series from the ABS only captures around 30% of the final household expenditure, it is still the most important indicator there is on how households are spending their money.

The strong performance of exports for a second quarter this year because of higher volumes and prices for some, such as iron ore, is also good news. Improved corporate profits in the September quarter are also expected to continue, with the dollar weakening and demand picking up. A big positive is the fall in business inventories in the second and third quarters, which means companies are not stuck with piles of unsold goods if demand turns down, and will probably have to step up output if demand continues to strengthen.

Despite today’s weaker-than-expected data, the combination of that and the early information on the current quarter means no more interest rate cuts unless China hits the wall — and there’s no sign of that. So we can look forward to months of the RBA sitting on the sidelines, watching the inflation data in particular and wondering when and if a rate rise is needed.

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    Dulong Ttil
    Posted Monday, 9 December 2013 at 8:42 pm | Permalink

    The China’s international trade figures, which were released during last weekend, are good but only limited to the Export from Chinese side. The figures of Imports into China are weak and have dropped significantly. It means China’s demands on importing goods from other countries, e.g. Australia etc. has been reduced substantially.

    This is a not a good signal to Australia.

    In such unfavorable case, the Australian government should consider to adopt tougher monetary easing policy to drive the A$ downwards healthily. So, our Export competitiveness can be strengthened and, our economy can be improved.

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