GDP data supports RBA rate cut — just

Tuesday’s RBA rate cut and this morning’s slightly weaker GDP September quarter numbers (including a 4% fall in our terms of trade) for the September quarter have had no impact on the value of the Aussie dollar which is now the big policy dilemma for the central bank and the federal government.

The rate cut rationale from the central bank was supported (just) by today’s GDP data, but had the RBA known of the composition of the growth drivers in the quarter, debate at the board meeting might not have been so one-sided in favour of a cut.

The economy continues to grow at around trend, with inflation low and productivity continuing to rise. And, despite that fall in our terms of trade and a 0.4% fall in real domestic income in the quarter, the savings rate only fell to 10% from a revised 10.9% (9.2% originally reported) in the June quarter (seasonally adjusted), while on a trend basis, the rise was sharper, from 9% to 10%.

That means consumers are still really cautious.

We will get an update in RBA thinking tonight (a day and a bit after Glenn Stevens’s statement on the rate cut) from Deputy Governor, Phil Lowe, who speaks at a business economists’ dinner in Sydney. His speech is entitled “What is the New Normal” — which gives us some idea that he will tell us the central bank believes that what we are currently experiencing in the wider economy is not going to change rapidly for some time to come.

That means a high dollar, which at close to $US1.048 is clearly too high for the current state of the economy and the immediate outlook. That’s cutting export income, pressuring trade-exposed sectors and services such as tourism and education. And yet today’s national accounts also reveal some tantalising data about how sections of industry are coping. For example the metal-bashing part of manufacturing helped the sector make a small positive contribution to growth after four quarters of subtracting from growth.

And it seems to be perplexing the RBA, which can’t seem to find a rational reason for its continued strength, especially with foreign bond purchases tailing off in the September quarter, which should have removed some of the demand for the currency.

Today’s ABS numbers for the September quarter — so this is now very old news — show GDP rose 0.5% in the quarter on a seasonally adjusted basis to be up 3.1% in the year to September 30, slower than the 0.6% (3.6%) growth and the now adjusted 1.3% (1.4% previously) growth rate in the March quarter. That’s an economy which is not too hot and not too cold, and certainly not growing above trend, as it seemed at the start of 2012, with all the attendant inflationary dangers.

The ABS said growth for the quarter was driven by a 0.5% contribution from private business investment, a 0.3% contribution from changes in inventories and a 0.2% contribution from household final consumption expenditure. These increases were partially offset by a -0.5% contribution from public investment as the federal and state governments cut spending in a process of fiscal consolidation.

Industries that drove growth in the September quarter were mining, (0.4%) manufacturing (0.1%) and Australia’s biggest employer, health (0.1%). In state final demand terms, WA is way out in front, on 9.6% seasonally-adjusted growth, and Tasmania way behind, with -5.7% growth.

There was also further inconvenient data for the flagging IR reform campaign. GDP per hour worked rose again, 0.7% in trend terms; market sector gross value added (per hour worked) was up 0.5%.

On top of this week’s wages data, and flat wages pressure data in the national accounts, the evidence that the government’s IR framework is a shackle on productivity or too conducive to wage pressures is becoming increasingly hard even for the most one-eyed business leaders to maintain.