What a difference hindsight can make in what passes for economic debate in Australia, especially among the commentariat in the national papers, and banking and finance circles. Now that we have nearly all of the economic data in for 2012, we can run the ruler over a year of articles warning of doom and gloom from slowing China, falling commodity prices, weakening growth, cautious consumers, retailing in crisis, the labour market slumping, productivity collapsing, the high Australian dollar.
It’s more than hindsight: commentators and analysts should understand that economic factors change over time and quite often turn out not to be very important, or surprise by emerging as a key development.
The key lesson is that the economy kept on keeping on, not in a boom-like way, but at or just below trend. Remember Joe Hockey saying trend growth was the same as “flatlining”? What Boomtown Joe won’t say is that trend growth is more sustainable and far less stressful than revving the economy up to 4%.
And that’s not to say that some development in Europe, China or the US won’t emerge and derail growth again. But that has been the fear since 2009, and each time we’ve dodged the bullet and the economy has kept growing. And there’s every chance 2013 will turn out to be, wait for it, around “trend” or a bit slower (2.5% growth is the forecast for this year), all things here and offshore (read Italy and the US) being equal.
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So why did the economy continue to chug along in 2012 despite the predictions of gloomsters? It’s because the long list of crises that commentators warned us about didn’t happen. Like:
The collapse in employment. Unemployment was regularly “tipped to rise” throughout 2012. Every month, declines in the ANZ job ads series was taken as evidence of an employment catastrophe. One News Ltd writer said in January the ANZ series meant “unemployment is expected to rise sharply”. Unemployment did rise to 5.4%, but the economy added over 100,000 jobs over 2012. Earlier this week, as the ANZ series posted its second consecutive rise, the media narrative had changed to “business are hiring again”, overlooking that the issue might lie more in a job ad series struggling to adjust to changes in how we advertise jobs.
Retailing and the cautious consumer. All the advocates of the “cautious consumer” keeping their wallets shut never quite explained facts like how Australians were still holidaying overseas in droves and buying new cars faster than ever (up 23%!). Traditional, non-food retailing was subdued, but survived and local retail businesses started the painful process of structural adjustment in an era where, even if only 2-3% of retail revenue goes to foreign websites, the competitive threat of online demands changes how Australian retailers operate (note that Gerry Harvey and Solomon Lew, the two main moaners about the internet, have fallen silent).
The death of manufacturing. Manufacturing didn’t collapse, it grew in employment in 2012, unusual for an industry that’s been under the cosh for decades. The ABS said yesterday the industries driving the rise in GDP were manufacturing, mining, health and finance, each contributing 0.1 per cent. Manufacturing is certainly doing it tough in some areas, and planned investment is down over the next 18 months, but it is definitely not dead.
The China Syndrome. Despite the predictions of doom, China’s slowdown didn’t bring our long boom to a halt: the Chinese Communist Party managed a “soft landing”, inflation eased and looks like continuing in that way, surprising even the Reserve Bank which had been increasingly concerned about rising cost pressures.
The collapse in exports. Exports, which had been all but abandoned by the gurus when the Chinese economy slowed last year, picked up and the December quarter national accounts showed they were were the largest contributor to growth, rising 3.3%. It was the second fastest quarterly increase in exports in a decade in the December quarter, off higher shipments of coal and iron ore, even as the latter saw a sharp surge in its global market price, a development missed by the experts. And nary a headline about the two-speed economy.
The productivity crisis. Notice even the national papers have stopped chattering about productivity? Gross value added per hour worked has been rising since December 2010, as has GDP per hour worked. That hasn’t stopped business whingeing about the need for more “workplace flexibility”. But it looks more like the special pleading that it is.
The bear market. Defying local pundits who forecast a long bear market, the sharemarket rose strongly (and the Australian market is now among the best performing in the world, even after Monday’s plunge). And despite thousands of words written recently about the impending poor December half-year profit season, those doom-ladened forecasts failed to eventuate.
Australia, the high-cost place to do business. The cost pressures in resources and associated areas are easing for the same reason they built up in the first place: Rio Tinto, Fortescue, BHP and a host of other miners have been curtailing expansion spending, and got serious about cost control and monitoring spending. The headlong charge to expand mines in WA and Queensland, plus the LNG investment boom, drove up prices. It wasn’t unions, poor labour relations or any of the other reasons trotted out by business, it was an uncontrolled investment splurge from miners, all trying to spend billions of dollars a week on similar projects, demanding the same resources.
Watch out for a new one to emerge in coming weeks: nominal versus real GDP. Joe Hockey issued a media release yesterday in which, for the first time ever, he simply ignored the real GDP numbers in favour of the nominal GDP numbers. Now: nominal is growth with inflation, real GDP is growth without inflation. Governments like nominal GDP to be higher than real GDP because it allows their revenues to rise faster than outlays; “fiscal drag” happens under high nominal GDP.
What happens when real GDP is higher than nominal GDP? Not much in the real world — but it does mean tougher budgets for federal, state and local governments.
So memo to Joe: there’s a simple reason. The national accounts showed the two main measures of inflation remained low. The implicit price deflator for household consumption rose 0.5% in the December quarter to be 2.4% over 2012. The GDP deflator — a broad measure of prices received by producers — fell 0.1% per cent last quarter to be 1.1% lower over the past year. This slowed growth in nominal GDP. That’s the strong dollar exerting downward pressure on prices and costs. And the smaller rise in nominal GDP underlines the strength of GDP growth in the economy because more of it came from higher demand than from inflation, which is surely a good thing — at least if you don’t have a government budget to run.