A series of economic reports this week have given us a fairly clear, if slightly laggy, understanding of where the economy is at as the government prepares to unveil the 2014-15 budget on Tuesday.
Remember that the official line from the government is that it inherited not merely a fiscal but an economic mess from the government: Treasurer Joe Hockey reduced Treasury and Finance’s pre-election growth forecasts to below-trend — 2.5% growth this financial year and next — as well as downgrading nominal GDP growth forecasts, then claiming the resulting reductions in tax revenue forecasts were Labor’s fault.
It’s clear now that the Hockey’s doom-laden growth predictions will be exceeded: the economy picked up in the second half of 2013, meaning we entered 2014 with growth at 2.8%, according to the December quarter national accounts. The Reserve Bank’s forecast in February (the RBA provides ranges over the longer term) was for growth this year centring on 2.75%, lifting to 3% in 2015. At this point, only a really severe El Nino might disrupt a return to trend growth and above in later 2015. It’s also clear that forecasts made last year about unemployment reaching 6.25% are now very unlikely to be met. Hockey downgraded the unemployment forecast for this year from 6.25% in the Pre-Election Economic and Fiscal Outlook to 6% in the Mid Year Economic and Fiscal Outlook, but left the 6.25% forecast for 2014-15 in place. Today’s April jobs data from the Australian Bureau of Statistics show unemployment steady at 5.8% seasonally adjusted, with just over 14,000 jobs created in the month, all of them full-time. Unemployment appears to have peaked at the end of 2013, consistent with the economy recovering since then.
But remember, this return to near-trend growth is happening while interest rates are still very low, and commodity prices, despite recent falls, are still historically high. It’s also patchy: New South Wales (5.4%) still has a full percentage point less unemployment than Victoria; Victoria, Queensland and South Australia are all around the 6.3-6.4% unemployment level (though South Australia enjoyed a big drop in unemployment in April), while Western Australia is still below 5%. The recovery from 2013 is still underway and being hampered by continuing weak public demand due to state and federal spending cuts and, maybe, by a faster-than-expected slowdown in mining investment. Remember, the RBA’s strategy has been to use low interest rates to return us to the more traditional growth pattern led by consumer demand and housing construction as the mining boom comes off.
On that front, the March building approval figures released earlier this week were mildly disappointing. Approval processes are lumpy and bureaucratic so too much shouldn’t be read into them, but Monday’s figures suggest the strong growth in residential construction we’ve seen over the last 12 months might have peaked — not helped, of course, by the continuing unwillingness of state governments to invest in social housing. On Tuesday, we’ll get housing finance figures for March, which might give us a better indication of how the construction sector is faring.
If that’s a note of caution, yesterday’s retail sales data from March also offer a caveat: a 0.5% rise in trend terms but just 0.1% in seasonally adjusted terms, after strong growth in January (1.1%) and February (0.3%), seasonally adjusted — although the usual suspect, department stores, was the chief culprit in dragging down the figures, which were otherwise positive for food and household goods.
March is when the government, and Hockey in particular, began seriously ramping up its apocalyptic rhetoric on the budget, on top of high-profile news about job losses. If it has had an impact on consumers, then it might have started to emerge in the sales data in March, which also recorded falls in consumer confidence (the two don’t necessarily go hand-in-hand, but seem to have done so that month).
Consumer confidence can be a fragile thing. It’s not necessarily the case that a tough budget will seriously damage — if voters believe that the government knows what its doing. The Rudd government’s ability to underpin consumer confidence in the face of a global financial crisis in 2009 reflected the purpose and determination that Rudd and then-treasurer Wayne Swan showed in how they proposed to respond to it as much as the handouts they dispatched to help stimulate the economy. Joe Hockey might have choked off his best prospect for a faster return to trend growth with his clumsy handling of the budget.
Let’s hope not.