The consequences of the Treasurer’s over-the-top rhetoric and his miscued budget are plain to see in the national accounts. But the commentariat risks repeating Hockey’s mistake just when the Treasurer appears to have worked out that bagging the economy and crying “emergency” doesn’t help.
While the growth rate for the year to December was 2.7% — better than the first year of Labor, Joe Hockey proudly boasted yesterday, as if he had a global financial crisis ahead of him — in fact the year divides into two clear halves. In the December (0.8%) and March (1%) quarters, growth ran at an annualised rate of 3.6%, a significant lift on growth earlier in 2013. In the June (0.5%) and September (0.3%) quarters, that fell to an annualised rate of just 1.6%. The tipping point was at the moment the government began ramping up its pre-budget austerity rhetoric, followed in short order by the National Commission of Audit report (quickly abandoned as “a report to the government”, not of the government) and then the budget itself, a masterpiece of political bungling. And the inflection is all the more significant because the Coalition promised that its election and its “open for business” attitude would provide the spark for consumer and business confidence to carry the economy upward. And that coincided, unfortunately with the slump in iron ore prices.
Now the commentariat runs the exact same risk with heedless talk of “income recession”, or even, as some pitched it yesterday, “technical income recession” — a term that basically didn’t exist before yesterday (google it and see how many references there are to “technical income recessions” before this week). Bank of America Merrill Lynch economist Saul Eslake used “income recession” in a research note earlier this week, which led commentators and journalists far less informed and with far less perspicacity to start throwing it around. “GDP: Australia enters income recession, dollar dives as economy stalls” ran a Fairfax headline yesterday, referring to two quarters or more of negative income growth (-0.2% in June and -0.3% in September). Sounds scary, huh? The term both has the terrible word “recession” in it, and is coupled with “income”, as though it’s your very own personal recession, which is even worse.
Asked about it yesterday, Hockey was, rightly, dismissive of it. The last thing we need is the Treasurer using the word “recession” about anything. Nor do we want a departing Treasury secretary in Martin Parkinson warning about “a fall in living standards’’ as he did yesterday, as if the slump in the terms of trade and tepid growth were a surprise to policymakers. There is a time for frankness and a time for reticence and yesterday was a time for the latter from Parkinson.
Yes, income is vital to GDP, but growth is also generated by production and spending, and households have high savings to make up for the lower income, which is primarily being driven by the fall in our terms of trade — a cumulative 27.4% since the December 2011 quarter. And no one picked up that the suddenly fashionable “income recession” was hardly new — indeed, at 0.5%, this is the mildest two-quarter “recession” in the past six years. There have been two other occasions of back-to-back quarters of falling real net disposable income — in the September quarter of 2012, income fell 0.7%, followed by 0.3% in the December quarter, and over three quarters in the depths of the GFC — from December 2008 to the June quarter of 2009, real net disposable income fell a nasty 5.6% in total. Compared to that, this current “income recession” is a doddle, but a media obsession with it will have very real impacts on consumers.
“The key question is whether the economy is weak enough to shift Hockey and his colleagues from merely letting the deficit widen … “
This brings to mind a point RBA Governor Glenn Stevens told the Committee for Economic Development of Australia annual dinner last month in his post-speech remarks:
“I think it is a mistake for us to keep telling this story of 23 years with no recession. I don’t actually think it’s accurate for a start … I think but for the vagaries of quarterly national accounting we might well have called the end of 2000 a recession. We would have called the end of 2008 one, in fact I would call it that … I think we had a recession then, but it was a brief one. It wasn’t terribly deep and we got out of it fairly quickly. The question isn’t how you can go another 23 years without a recession, it is how you have small ones and get out of them quickly. That’s a conversation worth having.”
And Dr Shane Oliver, AMP’s chief economist, offered some words of wisdom yesterday in note on the national accounts.
“There is also a danger in dwelling two much on the slump in real gross domestic income flowing from the falling terms of trade … while swings in the mining and energy export prices are very important for resource companies and hence for government revenues their impact on the rest of the economy is far more modest. For example, real gross domestic income surged through 2010-11 suggesting a booming national economy but at the time the “two speed economy” was at its worst with sectors like home building, retailing, tourism and manufacturing really struggling. Now these sectors are starting to come back to life to varying degrees.”
The other danger is believing that a Reserve Bank rate cut will help much. How will a rate cut to 2.25%, or lower, boost growth quickly, when the long period of rate-cutting that started in 2011 and continued through until 2013 didn’t help? In any event, a rate cut will take the best part of a year to flow through to the economy, taking us into the period when the RBA and Treasury expects growth to pick up, in the second half of next year.
The key question is whether the economy is weak enough to shift Hockey and his colleagues from merely letting the deficit widen — which it will, and probably substantially, as MYEFO will demonstrate — thereby providing more stimulus, into actively stimulating it further with measures other than the government’s much-ballyhooed infrastructure program (which is mostly Labor’s infrastructure program but announced by Deputy Prime Minister Warren Truss). That’s the only clear option if growth turns out, against expectations, to continue to be more post-2014 budget than pre-2014 budget.
What a time to have change in Secretaryship at the Treasury. Parkinson is finally leaving after being sacked by Abbott, over the wishes of Hockey, after the election, in a remarkable display of partisanship and incompetence. The rumoured but still unconfirmed replacement, former investment banker and Treasury official, John Fraser, will be starting from a position of considerable ignorance about the health and direction of the economy and experience in a low-growth environment.