Australia | Sep 02 2009
By Greg Peel
Thankfully, I was wrong. Despite not being an economist I had feared a combination of a big drop in bulk commodity contract prices and ongoing weakness in credit demand might offset the positive effects of government fiscal stimulus in the quarter and deliver a negative June quarter GDP. Economists had assumed a positive number right up to earlier this week, with consensus sitting at 0.6% growth, but after a large trade deficit and weak inventory numbers this week they pulled back to only a 0.2% consensus expectation.
They should have zipped it, because the result was indeed 0.6% growth.
The 0.6% seasonally adjusted result was accompanied by a confirmation (no revision) on the March quarter result of positive 0.4%, and the twelve month seasonally adjusted growth rate was also 0.6%.
Recession? What recession? It was less than twelve months ago that Lehman Bros went under and the expression “Global Financial Crisis” was coined. At one point we were talking Great Depression II, and yet Australia has posted 0.6% economic growth (0.3% if not seasonally adjusted) in the twelve months to end-June.
A true GFC would nevertheless not have been averted if it weren’t for the swift action of governments and central banks across the globe. Locally, the Reserve Bank of Australia aggressively slashed its cash rate from 7.25% to 3% and the federal government introduced bank deposit guarantees, first homeowner grants, and two cash hand-outs as immediate stimulus measures, along with announcing a huge program of public infrastructure spending funded on government debt. The second, larger and wider-based hand-out occurred within the June quarter, and along with other stimulus measures it had a big impact on the June quarter GDP result.
The second quarter consumption measure within the GDP showed growth of 0.8%, and one would suggest was 99% government stimulated. Fixed capital formation (investment) was down 1.9% in nominal terms but once seasonally adjusted was up 0.7%, presumably reflecting a quarter where businesses spend up ahead of the end of the tax year.
Prices were unsurprisingly down 2.2%, while what was surprising is that a big drop in the terms of trade – down 7.4% for the quarter (seasonally adjusted) – gave way to sufficient positive impetus on the consumption side. Disposable income was down 2.0%, again not surprising.
It is notable that the terms of trade – the balance of imports and exports – was down 11.6% over twelve months. Australia’s appetite for imports would have dried up until Kevin’s cheques arrived, while export volumes would have initially collapsed but then taken off again with Chinese buying in the first half 2009. The June quarter is the first quarter under revised contract prices (iron ore down 44% for example). It will now be interesting to see how the September quarter holds up.
And September will be devoid of Pennies from Kevin, and feature the death throes of the first home-owner’s grant (assuming no change to policy). Westpac’s economists also note that the private inventories number in the June quarter contracted only 0.4%, while economists had expected a 0.8% contraction following this week’s weak individual reading. What this means, however, is that the inventory rebuild expected to boost growth from here will not be quite as aggressive.
All this leads to the September quarter remaining a more indicative test case as to whether the Australian economy can indeed stand on its own two feet.
In the meantime, the RBA has an itchy trigger finger, if yesterday’s policy statement is anything to go by. A positive June quarter reading will do nothing to change this, although Westpac does not believe it will hasten the need for an interest rate rise. The result was, after all, in line with earlier expectations.
But after two consecutive quarters of growth, and 0.6% seasonally adjusted growth over twelve months (in a GFC), does the RBA want to keep holding at what it calls an “emergency” cash rate? Where, exactly, is the emergency?
The RBA might want to see how the numbers, and particularly the September quarter GDP first (without stimulus), but we won’t know the latter until December. There is plenty of scope for a rate hike before then.
Maybe a stock market pull-back might see the RBA re-holster.