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RBA will hold fire today as economy chugs along

The economy continues to underperform, though not as badly as the figures might suggest, Glenn Dyer and Bernard Keane write.

So we’re now two days into an important week of economic data, and the news is mixed: the economy was performing well in the first quarter of this year, but its trajectory since remains unclear.

This morning the Australian Bureau of Statistics revealed a strong trade turnaround in the first quarter, due to the rebound in the trade position from a small deficit in the December quarter to a big surplus in the three months to March. The net goods and services surplus rose more than 50% to $15,118 million in the quarter. That’s expected to add 1.4 percentage points to GDP growth in the quarter.

That should be more than enough to offset the expected detraction from growth from business inventories. Yesterday the ABS showed the value of inventories, or stocks, held by Australian companies fell 1.7% in the first quarter, enough to detract from GDP growth — some economists reckon -0.5%. But because business will have to rebuild those run-down stock levels, that means a positive impact on growth.

The net result is that the big contribution from trade and balance of payments will see estimates for March quarter GDP close to 1%, with the annual rate topping 3% (and therefore back on trend). Yesterday’s data confirmed that for all the moaning and groaning from companies about wage costs and the need for deregulation, Australia business is currently enjoying the best of both worlds — rising profits and weak-to-falling real wages. Company profits rose 3.1% in the quarter, while wages rose 0.2%. For the year to March, company profits were up 10.9% (all seasonally adjusted).

Now, not all areas of business are experiencing higher profits — some are doing it tougher. But that’s always the case, even when the economy is booming. Likewise, some sectors are still seeing solid wages growth, such as transport services where they rose 3.7% in the quarter. But in many others there was little or no growth; just 0.5% for construction and minus 1.2% in wholesaling, and no growth in mining (where the biggest whingers about how “Australia is a high cost place to do business” lurk).

That leads us to how the economy is performing in the current quarter — and the news isn’t so good. Yesterday the ABS revealed building approvals fell in April, thanks mostly to a 14.4% slide in approvals for non-private dwellings. That was the third big fall in this area this year, but this is a volatile set of figures because it relies on local governments processing approvals in a timely fashion, and they often process them in bunches.

That’s why another factor behind the fall was the fact that Easter and Anzac Day holidays occurred in April and virtually turned the last fortnight of the month into a public holiday. It is very hard to seasonally adjust for that, and it would not surprise if there is a rise in approvals in May because of the backlog. In any event, private house building approvals only fell 0.3% in April, so the larger side of the building sector remains alive (house prices fell in May, but much of that was due to big falls among the more expensive dwellings. Prices of cheaper houses rose in many markets).

This morning saw retail sales figures for April: turnover rose 0.2% — an improvement on March (0.1%) and better than expectations, but still sluggish and testimony to the impact of Treasurer Joe Hockey’s “budget emergency” rhetoric. The positive number was mainly thanks to Victoria (0.8%), as NSW was 0.1% and in Queensland and WA turnover actually fell, seasonally adjusted. Unusually, department stores didn’t fare too badly, with 2.9% seasonally adjusted growth, while food was flat (0.2%) and household goods fell. Again, not good, but not that bad either.

So the Reserve Bank won’t change rates at today’s board meeting — our trade performance boosted the economy in the March quarter but is still not strong enough and inflation is not anywhere near a concern to worry the bank. The best bet remains no rate movement in 2014. And tomorrow afternoon, we’ll find out what Treasury thinks of the state of the economy when it appears before budget estimates.

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