0.6%. A small number, but one that had the media immediately scrambling to get the inevitable “rate rise fears” into the ether to insert palpitations into the hearts of Australian home owners.
Wayne Swan will now get to brag to G20 finance ministers in London that his prescient approach to economic management rivals that of Peter Costello, leaving Joe Hockey and the Financial Review to carp from Canberra about classroom construction overheating aggregate demand. Swan told reporters this morning that the economy would have contracted by 1.3% over the past year if it wasn’t for his ahead of the curve economic wizardry. The stimulus will now be wound back, as Swan had apparently planned all along.
Still, the release of today’s growth result at least puts an end to the days of interminable media speculation over what minor economic indicators might mean for growth (infrastructure surge! Growth more likely. Corporate profits slump! Contraction feared. RBA hawkish! Growth mooted. Private credit slump! Net exports drag! etc.)
With the result now official, what do the real experts reckon? Is this proof of Australia’s economic execeptionalism persisting in the face of the global depression? Or just a blip on the radar before a Marxist crisis of over-accumulation lays waste to capitalism as we know it?
Crikey asked a varied bunch of leading economists for their considered views.
Saul Eslake, The Grattan Institute: Australia’s economy grew by 0.6% in the June quarter — much in line with consensus estimates as they stood at the end of last week, but better than had seemed in prospect after the inventories and net exports figures released earlier this week. And the March quarter figure remained unchanged at 0.4%, rather than being revised down as some had expected. So in a year in which most Western economies registered three or even four quarters of negative real GDP growth, Australia recorded only one. For us, the impact of the global financial crisis is more apparent in the estimates of real gross domestic income or GDI, which takes account of movements in the terms of trade; that has declined for three consecutive quarters, including by 1.1% in the June quarter.
The effects of the government’s fiscal stimulus measures was apparent in the 2.3% rise in real household disposable income in the June quarter, which allowed households to increase their spending by 0.8% while also lifting their saving ratio by 1.6 pc points to 4.0%, the second-highest figure in nearly a decade. The RBA’s interest rate cuts helped too, with the proportion of household income absorbed by interest payments falling to 9.1% (compared with a peak of 14.4% in the June quarter 2008). Tax breaks for small business equipment purchases also contributed to the rise in business investment in the June quarter. On the other hand, and surprisingly, public sector spending actually declined for a second consecutive quarter.
The other surprise was that stocks actually added 0.2 percentage points to GDP growth in the June quarter. This was largely due to a 0.6 percentage point positive contribution from farm stocks, but the run-down in non-farm stocks was only half what had been suggested by the survey released on Monday.
Overall, today’s figures will add to confidence that the Australian economy has weathered the global financial and economic storm remarkably well, and thus to the probability that the Reserve Bank will lift interest rates before Christmas.
Warren Hogan, ANZ Chief Economist: This is a fantastic outcome for Australia. GDP surprised on the upside, although the results are broadly in line with our view that the economy has been stable through the worst global economic downturn since the 1930s. Importantly the composition of growth is shifting away from the strong net export contributions seen in Q4 last year and Q1 this year toward underlying domestic demand. Non-farm GDP rose by 1.1%, the strongest result since the start of 2007, again highlighting the positive impact of government policy initiatives in keeping a floor under demand and confidence in this economy.
A return to growth in private sector spending is an early sign of an economic recovery. Government policy actions continue to be a critical factor supporting the economy and today’s report highlights some further encouraging signs that as the initial fiscal stimulus to household and business fades, a more enduring effect from infrastructure programs may take hold. Infrastructure spending rose as did public investment.
These sectors will become increasing important over the year ahead. Domestic demand grew by 0.8% in the June quarter with strong contributions from household consumption (thanks to the one-off payments to households) and increased business spending (government tax incentives). The saving rate jumped to 4% from 2.4% the previous quarter suggesting that while some of the government’s payments to households had been spent, some was saved, putting the Australian consumer in a better financial position for the future.
These numbers are likely to see the RBA and Treasury revise up forecasts for the economy further. The good news is that the government’s deficit will be much smaller than expected at the time of the May budget; the bad news, interest rates are going to have to rise.
Adam Carr, ICAP: All that worry for nothing — this economy is running hot. Domestic demand shows that we’re firing on almost all cylinders — household consumption up 0.8%, business investment up 1.9% — in fact the only real area of weakness came from residential investment. The thing is we know where this is headed — building approvals are up, lending is up etc. So in my opinion we will be soon firing on all cylinders — certainly in 2010 and probably in 2H09. I don’t think today’s number will encourage the RBA to tighten earlier, though it may affect how aggressively they tighten over the next 6-months. Don’t forget that the RBA has suggested they want to wait and determine whether the recent strength was due to one-off stimulus measures. December is the most likely time for the first rate hike for me then. To get an October hike you’d need to see strong retail numbers, another solid equity rally a decent run on the global data. That’s certainly plausible but I’m not expecting such one-way flow.
Rory Robertson, Macquarie Bank: GDP rose by 0.6% in Q2 after rising by 0.4% (unrevised) in Q1. Importantly, non-farm GDP is estimated to have grown by a strong 1.1% in Q1 after a 0.5% increase in Q1. That is, the Australian economy grew by 1% over the first half of the year, confounding many turn-of-the-year forecasts that it would shrink. Consumption grew solidly (up by 0.8%) in Q2, while exports and business investment both rose rather than fell (as was already known). Yes, today’s result is “history”. After all, we’re already two-thirds of the way through Q3. But 1% GDP growth over the first half of 2009 is a brand-new history that the RBA now can use to further its argument that the “economic emergency” that prompted its extraordinarily-low 3% cash rate has passed, and so the time has come to tighten somewhat its loosest-ever setting of policy.
Accordingly, the 6 October Board meeting is “live” with potential for the RBA’s first hike. As argued here before, last week’s much-brighter news on business investment — alongside this week’s stronger increases in house prices in June and July — suggests that something bad now needs to happen to stop the RBA from fast-tracking its first hike to October.
I still expect any first hike on 6 October to be 25bp rather than 50bp. Longer term, I still reckon the market’s scenario of 2pp worth of RBA hikes over the coming year is much more aggressive than is likely, given my sense that the Australian and global economies will struggle to produce decent jobs growth over the next year or two, and that wages growth and trend inflation will continue to subside almost everywhere.
Steve Keen, The University of Western Sydney: Plain sailing ahead? The headline number for GDP looks pretty good — an 0.6% increase in GDP for the quarter. This is less than the most optimistic revisions that were doing the rounds in the last couple of weeks, but well clear of negative territory. But as usual, the detail reveals a complex picture that certainly can’t be described as a “return to normal growth”. Take a comparison of the percentage change in the GDP figures using the chain weighted measure, which is intended to remove the effect of changes in prices, versus the original unadjusted data:
- Sep-2008 0.3 3.2
- Dec-2008 -0.7 -0.1
- Mar-2009 0.4 -0.6
- Jun-2009 0.6 -1.5
The price-modified GDP series is moving in the way one would expect for an economy recovering from an unexpectedly slight hiccup caused by “the biggest financial crisis since WWII”. The original data series, on the other hand, is moving in the way one might expect if the GFC still has legs. It appears that recorded movements in real output are being affected more by movements in the price deflator than in the actual volume of output:
Non-Farm Implicit Price Deflator
- Sep-2008 3.1
- Dec-2008 0.8
- Mar-2009 -1.0
- Jun-2009 -2.3
I don’t think this set of data decides the case between the optimists or the pessimists on the future course of the economy. But it should be seen within the context of the scale of the government stimulus the economy has been given up until now. Is this the best the economy can do with a stimulus in the range of 4% of GDP?