Joe Hockey will probably dodge a bullet tomorrow, with the March quarter GDP result likely to show positive growth. But the numbers are likely to confirm economic growth around 2%, and there’s bad news for the budget bottom line in the latest economic releases.
The March quarter current account balance and the government finance statistics from the Australian Bureau of Statistics today were broadly OK for growth. Importantly, the current account will contribute 0.5 percentage points to growth in tomorrow’s data — although that will have to offset the impact of the 0.5% fall in spending on plant and machinery in the March quarter in the private investment data last week. Yesterday’s business indicators data from the ABS suggest inventories will provide a boost to the GDP result, with 0.4% growth seasonally adjusted in the March quarter, after a -0.8% result in the December quarter.
The big imponderable for economists is the size of household consumption, given that car sales were very strong in the quarter, but retail sales weak. But the home building and apart boom continued to power ahead with residential construction growing 4.8% in the March quarter. If we get a modest rise in growth tomorrow, that will be the driver, along with the small rise in inventories. Economists’ predictions are for a 0.5-0.6% result, although some are tipping as low as 0.3%. Even 0.6% will leave growth for the year to March at 2%, well below the budget’s forecast for 2014-15 of 2.5% and auguring poorly for the forecast 2.75% in 2015-16.
That doesn’t mean the Reserve Bank will cut interest rates today — the strong expectation is that they’ll remain on hold while the bank assesses what impact its previous cuts and the budget will have on growth, and in any event there’s a legitimate question — one raised by the bank itself — about how much benefit more interest rate cuts will have at the moment. In fact, a rate cut today would stampede the horses and trigger a crisis of confidence, because it would be interpreted as telling us the Reserve Bank sees something wrong in the economy and needed to spring a completely unexpected rate cut on us.
Another section of the business indicators data should also have the government worried. Wages and salaries actually fell in the March quarter, by 0.1% seasonally adjusted. The last time wages fell was in the depths of the financial crisis in 2009, and follows two previous quarters of weak growth. Remember the budget forecasts a healthy 2.5% wage index growth this year and 2015-16 — forecasts that were immediately undermined. The business indicators wages result suggests wage growth could be even weaker, which will directly reduce Hockey’s bottom line by reducing income tax revenue and bracket creep. On the positive side, there was at least some growth in company profits — 0.2%, but that’s better than the falls of the last three quarters.
Let’s also note one other number — one not from the ABS, and much more subjective. Today Dun and Bradstreet reported a big fall in business expectations for the coming third quarter of the year. We can take or leave business and consumer sentiment surveys as a reliable and consistent indicator of anything much, but what was startling was that the big fall in sentiment occurred in the wake of a budget supposedly intended to get business moving and spending again. If the budget has prompted a massive drop in business sentiment rather than the expected surge, where does that leave the economy over the coming 12 months?
What may well have happened is that business has actually read the 2015-16 budget perfectly accurately: they understand that, despite the small business handouts, it is intended to be, in Joe Hockey’s phrase “mildly contractionary” (although we suspect it will eventually prove flat, as the budget deficit blows out to around this year’s level). And more to the point, they understand that this government has lost any interest in genuine economic reform because it would entail political risk, and it is not prepared to do anything politically risky after Abbott’s near-death experience earlier this year.
An economy growing at 2%, collapsing investment and weak wages growth ahead, and a government determined not to do anything that might upset voters or its own backbench. What company is going to dust off expansion and investment plans at a time like this, even with interest rates at historic lows?