Shock horror — the sky’s still up there, life as we know it in the wonder economy continues.

GDP contracted 1.2%, after the 0.7% rise in the December quarter and 0.2% improvement in the three months to September.

The contraction came from the slump in coal production and exports, as well as a smaller fall in iron ore shipments: and the blame can be sheeted home to the weather, not to demand from China, India or South Korea, or Japan for that matter, which is continuing to drive our terms of trade higher.

But there were more than a few signs of growth in the domestic economy — a rise in the terms of trade offset the contraction in volume terms to produce a flat outcome in real gross income for the three months: that is probably the more important of the measures.

And household consumption was positive, while the savings ratio jumped noticeably. The key employment sectors of retail and construction were both positive — a good outcome especially for the latter, which has seen a near-collapse in housing construction in recent months.

The result’s a painful one for some parts of the economic commentariat. Didn’t Goldman Sachs and their team of economists look a right bunch of dopes after a breathless story on the Sydney Morning Herald website this morning warned of the sharpest slowdown “since Gough Whitlam was prime minister” with a prediction of -2% in the first quarter of the year, a big turnaround from the 0.7 per cent expansion in the final quarter of 2010.

“Though the Reserve Bank has declared its intention to look through flood disruptions, the size of the likely GDP contraction implies that it has either miscalculated its size or overestimated the strength of the underlying economy,” Goldman Sachs had warned, in words that might better apply to themselves.

Comsec’s Craig James likewise had us on the Eve of Destruction: “So unquestionably poor is the news it raises real doubts about the true state of the Australian economy. The Reserve Bank holds to the belief that the economy will rebound later in the year, but you don’t get a sense of that from the data.” James had conflated the huge one-off impact of the summer’s natural disasters and their impact on the balance of payments with other (and quite real) issues around the weak lending data and building approvals for April.

Alas, the ABS didn’t show up for the end-of-the-world party. “Flooding which began in late December 2010 combined with cyclones in both Queensland and Western Australian have had a significant impact on the March quarter activity. Despite the fall in GDP volumes there was an increase of an increase of 0.3% in Real gross national income driven by an increase of 5.8% in the terms of trade on the back of stronger commodity prices:

“The main detractors to expenditure on GDP were Net exports (-2.4 percentage points) and Inventories (-0.5 percentage points). Private gross fixed capital formation (0.7 percentage points) was the largest positive contributor. From an industry perspective the main detractor to GDP was Mining (down 6.1%) with a 0.6 percentage points detraction, while Manufacturing (down 2.4%) and Agriculture (down 8.9%) both detracted 0.2 points from GDP.”

Nothing of any surprise there after the record fall in trade outlined in yesterday’s balance of payments for the March quarter. The contribution from investment of 0.7% tells us the mining boom is alive and very well. Even household consumption was positive — so much for the two speed economy and excessively cautious consumers. That rise in household consumption was achieved despite the savings ratio rising to 11.5%.

The domestic economy is running sluggishly, but it hasn’t stalled, as some would have had us believe yesterday and this morning. What will everybody say if the economy bounces back with a 1% rise in GDP in the current quarter (remember, today’s result is going back more than three months in time). It will pay to read tomorrow’s April trade figures, they could very well give us an early clue. Back to the usual Rate Rise Looms as a headline, presumably.

Nonetheless, the hit to growth is much higher than Treasury initially expected, and bigger than it calculated in the Budget. The Opposition chorus that the blowout in this year’s deficit reflects Labor’s incompetence looks dumber and dumber with each piece of evidence that the cyclones and floods belted the daylights out of even the booming mining industry up in Queensland.

In light of these figures, Wayne Swan’s fiscal juggling act on budget night — keeping the ping-pong ball of short-term growth and the bowling ball of long-term growth in the air at the same time — looks better than it seemed at the time.

Peter Fray

A lot can happen in 3 months.

3 months is a long time in 2020. Join us to make sense of it all.

Get you first 12 weeks of Crikey for just $12. Cancel anytime.

Peter Fray
Editor-in-chief of Crikey

12 weeks for $12