So after a big week of economic data, what did we learn about the economy?
Well, the outlook offshore hasn’t changed. It’s still fraught, but the catastrophe hasn’t arrived. China’s rate cut overnight ahead of the May economic data later today and tomorrow is a sign that the authorities in our most important export market are getting worried. But Europe calmed down a bit overnight after Spain sold debt (though had its rating cut by Fitch), while in the US, Fed chairman Ben Bernanke didn’t mention that magic initials QE (quantitative easing) in other than a passing fashion.
At home, to the surprise of many and the dismay of a few, we discovered that the economy isn’t the basket case a fleet of analysts, writers, PR shills and others (such as the Running Man and his shadow Treasurer) have insisted needs more rate cuts and help. In fact, the economy is doing pretty well, jobs remain solid, growth was more broad-based in the first quarter than previously thought and households continue to spend, much to the frustration of all those “experts” who reckon times are really tough.
Productivity is also up — notice there were no mea culpas from commentators about that? — and (despite what Ewin Hannan tried to claim in The Australian today) industrial disputes were down again. We’re getting strong growth from the resources sector and support from consumers, but also the productivity benefits of a trade-exposed sector dealing with a competition shock via the higher dollar. It’s an unusual combination, but a good one.
A common cop out in the reporting of the March quarter accounts was that they were “backward looking” (Jennifer Hewitt in the Financial Review) or “lovely figures but now’s not the time to look back” (The Australian on page one). This view was also common among the economic commentariat as a way of explaining away their errors. But then along came the May jobs data, which confirmed the economy is doing better than the “backwards” crowd care to admit.
As well we got the trade figures and housing finance data this morning from the ABS. As expected the housing finance figures were weak, as building approvals have been showing, as well as the national accounts. The trade account remains in deficit, (down to $203 million in April), better than in previous months because of higher exports (up 3% and a 1% drop in imports). But the red ink was expected this year thanks to lower prices for many commodities and weak volume growth, as well as the continuing high level of imports of capital goods to feed the investment boom. No real shocks there.
But there was a real shock several minutes after the ABS data was released: contrary to endless amounts of newspaper speculation, the ANZ passed on all 0.25% of the RBA cut to its home loan mortgage holders. The ANZ’s new standard variable mortgage rate will be 6.80% from next Friday. The move puts pressure on rivals Commonwealth Bank, NAB and Westpac to follow suit. The Bank of Queensland has been left looking greedy as it passed on only 0.20% instead of the full quarter of a per cent cut.
The odd thing about the “backwards” crowd is that they’re so busy looking forward they miss what actually happened in the past. Sometimes looking backward can be very instructive, given how dramatically the ABS can revise data to give us a clearer picture of what actually happened. Since the first quarter of last year when the Queensland floods and cyclone Yasi destabilised the supply side of the economy (mostly coal exports) and prices, the economy has been accelerating.
Indeed, the economy has been recovering the growth track it was on before the floods and cyclone. Remember the 1.4% bounce in the June 2011 quarter from March’s dip? It was originally reported as a 1.2% rise, against the 1.2% fall in the March quarter (and now cut to a negative 0.50%), meaning no growth in the first half of 2011. Now the ABS says growth was 0.9% in the six months, which is very solid given the impact of the floods. And the December quarter’s 0.4% growth was revised up to a more comfortable 0.6%. Moreover, price pressures have been easing since the first quarter of last year.
We also need to start adjusting the characteristics we associate with a strong economy. For decades retail sales have been a guide to consumer sentiment and economic health. That’s changing because our spending habits are changing and our retail sales data have a big gap in them. On Tuesday, just before the rate cut from the RBA, the May car sales data were released by the Federated Chamber of Automotive Industries, which showed that a record 96,069 vehicles were sold in May, up a mammoth 24%, or 18,668, from the previous corresponding month in 2011 (affected by the Japanese quake and tsunami), but also 16,000 more than the 79,097 vehicles were sold in April, and more than 85,700 in February and 76,700 in January (sales were 97,000 in March).
And overseas travel remains solid with a 5-6% rise in the year to April (and an increase in the same range in tourists). Spending is increasing on services, as the Reserve Bank’s deputy governor, Phil Lowe, pointed out in an important speech last September . This was borne out in the national accounts with a strong rise in spending on services, such as travel, finance, insurance, food and eating out. That was behind the strong rise in household spending in the quarter.
As the economy changes, and we ourselves change in our habits, we need to alter our economic expectations. And the ABS needs to adjust its indicators, too, especially in the way retail sales and the consumption of services are measured.
Two other points emerge from the national accounts: first, the start of the carbon tax won’t derail growth when it starts on July 1. Far from being the wrong time to start a new tax when the economy is weak, the economy is strong in many sectors and has the underpinning to withstand the impact of a new tax (bearing in mind the carbon price will be just under a third the size of the GST), as do prices that are not growing as strongly as they were a year ago.
And, remember all the stuff sprouted by the mining industry and its media mates about the damage the new mining tax would do? Well the continuing rise in planned mining investment would give lie to that garbage. As the Business Council points out in its dodgy report yesterday, our investment to GDP ratio is now nearing 30% and is one of the highest in the world. And the 2.3% contribution to first-quarter growth from mining, especially mining investment, should once and for all end the claims that the tax would increase unemployment and impact the wider economy. Not a word about that from the Running Man or the AFR or The Australian.
Now, let’s do some looking forward of our own. In the conclusion to the commentary in the otherwise excellent analysis of the national accounts from Westpac and its economics team, here’s what chief economist Bill Evans (the most extreme of the rate-cut urgers) concluded:
“It is our view that with global uncertainties weighing on confidence, national income crimped by a falling terms of trade, the housing sector in poor condition, with house prices continuing to contract modestly, and jobs growth likely to falter, this burst of consumer spending is unlikely to be sustained. Accordingly, the recent rate cuts are fully justified and the need to go even further remains. The test now will be how forward looking the authorities are prepared to be in the face of this spending burst.”
You can’t keep the pessimists down, you see — there’s always something bad just around the corner. But judging by the evidence of the past 12 months, the Australian economy will perform better than the doomsayers predict, even if the various feared disasters eventuate. There’s one thing that Wayne Swan and Joe Hockey agreed on this week — the economy, and Australians, have been “resilient” despite all the bad news and fear mongering. It’s just that we’ve been too preoccupied to see it right before our eyes.