Australia | Jun 03 2009
By Greg Peel
I don’t think I can bear to watch the parliamentary response to the news that Australia is not in a recession after all. Wayne will be swanning around a fuming Malcolm while Malcolm will no doubt be again showing how good an intelligent man can be at acting the complete opposite. Joe will be trying to find someone to explain it all to him and Kevin will be trying hard to maintain a typically dour expression. All over one little number.
It is nevertheless great news that Australia’s March quarter GDP rose by 0.4% when, up until fairly recently, there was almost universal acceptance the number would be on the negative side of the ledger. The December quarter saw contraction of 0.6% (revised down today from 0.5%) previously and we all waited with baited breath for the 11.30am announcement so we would know whether or not we have been in a recession.
We might as well have been hanging on to hear the winner of Australian Idol.
And so, as it turns out, we haven’t been in a recession. Just in something that looks a helluva lot like one but had us all fooled. At least all the recent bankruptcy and foreclosure victims, the recently laid off and those holding nasty letters from debt retrieval agencies now have something to feel good about tonight. Half a percent lower and they would have been quite miserable. Half a percent lower and one shudders to think what rubbish Malcolm would have spewed forth.
So we have not been in a “technical” recession. As this is very much a rear vision consideration, there is nothing to say we won’t end up in one yet. But now that we have had a positive quarter, we would have to wait until after September for the Australian Idol finals again. Nevertheless, a positive March quarter bodes well for a positive June quarter, given more “green shoots” have been appearing since March 30.
Or have they?
ANZ chief economist Rick Polygenis finds little to feel encouraged about in today’s GDP breakdown, other than to note Australia’s annual rate of growth actually increased from 0.3% to 0.4% in March making it “the best outcome by far of all the advanced economies”. At the end of the day, notes Polygenis, the GDP figure was assisted by a government hand-out, which has now been handed out, lower interest rates, the novelty of which has probably worn off, and solid bulk export earnings, the prices of which are currently being revised down by a third.
Household spending rose by a solid 0.6% in the first quarter as petrol prices eased, interest rates fell and the Pennies floated down from Kevin. Yet this was not enough to grow the domestic economy, which contracted by 0.1%. The biggest contributor to the bottom line was net exports, which contributed a full 2.2 percentage points to the 0.4% net GDP result, yet this was not so much a strong result in exports as it was a weak result in imports, which fell 7%. This implies businesses were unwilling to purchase capital equipment or restock shelves. Nor were consumers willing to lash out on imported goods.
As the effects of the drought eased off and many areas experienced healthy rains, a cyclical bounce in rural export volumes also helped.
But the production measure within the GDP was down 0.9%, following a 0.6% reduction in the December quarter. This ongoing contraction highlights “the continuing fragility of the economy,” Polygenis suggests. Manufacturing has been hardest hit, falling 3.3% in the March quarter to be down 9% from a year ago. Real output actually shrank in agriculture and mining as well as property and business services, while wholesale trade and transport also contracted. Stronger retail spending kept retail trade positive but hospitality and recreational services were both big losers.
“The composition of growth,” suggests Polygenis, “is not reassuring”. The household sector is receiving support from policy measures but elsewhere the business sector is showing “all the hallmarks of contraction” as investment, production and inventories fall. ANZ is concerned the factors that “propped up” first quarter growth will not been sustained. And there is significant downside risk to the household sector if there are no new hand-outs while unemployment continues to grow. Australians may have splurged their Pennies from Kevin, but the acceleration in first quarter consumption was also driven by a “fairly sharp” fall in the household savings ratio.
We will now shift down to bulk commodity export prices around a third less than last quarter and other commodity exports are at risk if China ceases stockpile building. The Aussie is on the rise again to act as a dampener on export earnings and inflation fears are driving long bond yields higher, making term interest rates more expensive. On the positive side, planned government infrastructure stimulus will help support the economy but “this will not be enough to offset sharply lower business investment,” Polygenis notes.
The Westpac economists go a step further and warn that Australia’s “point estimate” method of GDP calculation can be misleading. If we used the New Zealand method of measurement, they note, we would not be looking at 0.4% first quarter growth but at a 0.9% contraction and thus, for what it’s worth, a “technical” recession. Westpac concludes that “The global recession and the loss of national income will see economic conditions remain mixed in the near term”.
The Commonwealth economists note that despite the +0.4% result, “the Australian recession is very much an income recession”. Both household income and corporate profits are falling. In other words, CommBank is paying little attention to “technical” definitions. The broadest income measure – nominal GDP – fell 0.6% in the March quarter after falling 0.2% in the December quarter.
“Consecutive declines in nominal GDP,” say the economists, “are extremely rare. The last occasion was in the early 1990s recession.”
So – still slurping that champagne? Rest assured that “technical” definitions are really only political fodder. That Australia has “avoided recession” will add to the level of confidence, but “green shoots” and “bamboo shoots” had better turn into something more than just hopeful signs or we will be staring June quarter contraction in the face. A positive result does not mean all subsequent results must be increasingly positive, or even positive at all. CommBank notes:
“An improvement in confidence is an essential precondition for financial market stabilisation and economic recovery. The recent focus on the ‘green shoots’ of recovery is encouraging from that perspective. While we remain cautious overall, it is worth considering the likely shape of any global recovery. Unfortunately, the factors that make recessions associated with financial crisis longer and deeper also tend to mute recoveries when they finally arrive.”
The Reserve Bank left rates on hold yesterday as it closely watched for ongoing signs of economic improvement. Yet the central bank stands ready to slash again at the drop of a hat if necessary. The RBA will applaud a positive GDP number bit it will not drop its guard.
When the pollies come on the TV tonight, turn it off quickly to avoid nausea.