Australia | Dec 16 2009
By Greg Peel
Australian economic growth is expected to return to trend in 2010. So says the RBA – a view which has become increasingly more definitive at each month’s monetary policy meeting. But economist consensus had Australia’s GDP growing at 0.4% in the third quarter, and yet the result came out at only 0.2%. Surely this result would nip a February rate rise in the bud?
Not necessarily. This, for example, was the response to the GDP result from the ANZ Bank economist Dr Alex Joiner, who had correctly called the 0.2% rise:
“Given the strength of the underlying economy suggested by these numbers we think the Australian economy is progressing well into the recovery phase. A trend level of growth in 2010 looks likely and as such the RBA will remain vigilant on official interest rates into next year.”
In the March quarter, the Australian economy surprised most by producing 0.4% GDP growth following a 0.5% fall in the December quarter 2008. The December quarter contraction was no great surprise, coming hot on the heels of the Lehman collapse and subsequent GFC, but in theory one can’t have a recession without two consecutive quarters of negative growth, and everyone expected a recession. When March surprised to the upside, the next thought was perhaps the June quarter would show contraction again, but such thoughts were quickly scuppered when the Australian government started throwing stimulus money about like lollies and after the RBA had cut rates faster than the human eye could detect in 4Q08 and 1Q09.
The trick with the March quarter result was, however, bulk commodity prices. Firstly, iron ore and coal prices were still locked in to annual contracts, and the last annual contract price had been set when commodity prices in general were raging. Secondly, China decided to stimulate the world all by itself in the March quarter, buying more iron ore and other commodities than it ever had, ever. Thirdly, the Aussie dollar had collapsed post Lehman and not yet fully rebounded, meaning Australia was enjoying an absolute bonanza of commodity export receipts.
The June quarter was supposed to be affected by new, lower bulk commodity price contracts alongside a massive drop in consumer spending and an inventory destocking phase, but the government’s cash hand-outs, home-buyer grants and various other incentives helped the GDP along to a healthy 0.6% growth. At that point, the thought was perhaps September would be the negative quarter after some of the stimulus measures had expired.
But no – we scored another positive with a 0.2% result, and this time no one’s expecting any contraction anymore. Okay – so it wasn’t the 0.4% economist consensus had suggested, and a constantly remarkable Australian performance in unemployment and other data had suggested, but it was still positive when six months ago a negative forecast for September was the norm.
So this is not glass half empty stuff, it’s glass half full stuff. There is nothing about a 0.2% GDP growth result for the quarter that’s going to sway the RBA’s general thinking.
As the Westpac economics team suggested in response to the number (0.4% forecast – tough luck guys):
The GDP was a little softer than expected, but “That said, the Australian economy has proved to be resilient in 2009, given the weakness of the global economy and the associated global credit crisis. Aggressive fiscal and monetary policy stimulus, a sound banking system, plus a resurgent China, were pivotal to this performance.”
The yearly rate of 2009 GDP growth was 0.5% at the end of September, following one and one only negative quarter in 2008. This is a GFC? By contrast, the US endured six consecutive months of contraction before scoring a positive quarter, and we won’t tease the hapless Poms. Yet for one measly little quarter of negative growth, a panicked RBA slashed its cash rate from 7.25% in September 2008 to 3% by April.
We won’t, however, blame Glenn Stevens and team. Indeed, the RBA’s swift action has a lot to do with why Australia did not suffer a technical recession, as does swift government action, China, and Australia’s obsessive love of big houses and even bigger televisions.
Indeed, consumer spending increased in the September quarter by a much higher than expected 0.7%. Dwelling construction was another surprise on the upside, rising almost 6% and signalling the start of what, suggests Westpac, will be a strong upswing. Business investment declined in the quarter, but then government tax incentives in the June quarter, in which growth was 0.6%, tended to encourage “front-loading” of investment.
ANZ notes that GDP growth in the September quarter was dominated by the services sector, despite Australia’s reliance on digging stuff out of the ground. “Rental, hiring and real estate services” grew 9.9% after falling 2.1% in June and 3.3% in March. “Transport, postal and warehousing services” grew 2.5%. “Healthcare and social assistance services” grew 0.8%.
Mining still grew – by 0.6% – and is now 0.7% up on a year ago. Manufacturing grew 0.3% but is down 7.8% from a year ago. Agricultural output fell 1.9% in the quarter and is 14.1% below a year ago as drought once again encroaches on our parched land.
But all up, it’s a great result, and little reason to believe the difference between 0.2% and a forecast 0.4% is going to make the RBA think twice. We will get more rate rises in 2010, don’t you worry about that. As to whether or not the next one will be as soon as February well, the odds are in favour, but there will be plenty of data to digest in the meantime, including Christmas spending.