Australia | Sep 01 2010
By Greg Peel
Australia's June quarter GDP rose by 1.2% against market expectations of 0.9%. The March quarter result was revised up to 0.7% from 0.5% giving an overall annualised rate of growth of 3.3%. That's the fastest growth rate since the March quarter 2008.
While the difference between 0.9% and 1.2% may seem like a trifle to some readers, it must be appreciated that this is a 33% “beat”.
According to a vindicated and effusive Cliff Bennett at Herston Economics, the result “confirms the resilience of the Australian economy through the GFC period, and the re-establishment of the economy on a stable and healthy path forward.
“This is the result of two to three decades hard work by both sides of politics, business, and trade unions, in moving the Australian economy to the forefront of deregulated free markets in the global community. This has allowed Australia to successfully take advantage of our location in the Asian growth region.”
While that's all well and good, the reason economists were completely caught out is evident in the consumer spending numbers. Consumer spending jumped 1.6% in the June quarter which is equivalent to all of the previous three quarters combined. This is startling given anecdotal evidence has been very much to the contrary. We recall that just about every retail outlet in the country was discounting goods ahead of the typical July stock take sales this year. We also note weaker than expected sales numbers from various (albeit not all) listed consumer stocks in the FY10 results.
Outside of consumer spending, everything else was pretty much as assumed. The real driver of GDP growth was of course exports which grew 4.5% in the quarter in volume terms , pushing the terms of trade up by a record 12.5%. Business investment was again lacklustre, falling by 0.3%.
It is business demand that economists have been relying on for further growth, although this is expected down the track and the result did not surprise. While the consumer has proven relatively resilient, certainly in comparison to other Western economies, the expected turnaround in business growth out of the GFC has been a long time coming. This is largely because all of the RBA's emergency rate relief went towards mortgages while banks held business lending rates at high levels and tightened lending standards. Now we're back at “normal” interest rates.
From the more macro level, economists have been looking for evidence the Australian private sector can take the baton post-GFC from the public sector now stimulus measures are fading. And while government spending did increase by 1.2% in the quarter, that's down from an average 4% in the three previous quarters, Westpac notes. With all of consumption, housing construction and infrastructure investment rising in these numbers, Westpac suggests that evidence is indeed emerging.
While inflation is currently running below the RBA's top-end target, the risk is it will get out of hand if both the terms of trade and private sector spending unite. ANZ notes that business investment intention surveys recently have suggested the long awaited revival is about to occur, and when the expected surge hits limited spare capacity there will be “tremendous” pressure on prices.
To that end, ANZ is sticking with its forecast for two more rate hikes before year end, likely in November and December.
Westpac, however, is not as hawkish. The economists expect government spending to continue to slide but do not see the big jump in consumer spending as carrying over into the September quarter. In reality, notes Westpac, April, May and June are a long time gone and April was the peak month for market enthusiasm. July and August are not providing quite so positive a picture now that global economic concerns have resurfaced.
And for Cliff Bennett, it's a simple equation. “We continue to shout from any rooftop we can find,” says Bennett, “growth DOES NOT equal inflation”.
Competitive price pressures will efficiently contain inflationary pressures in general, suggests Bennett, and the strong GDP result, particularly in exports, “disguises some lingering weak spots in the economy that warrant further monetary policy nurturing as they have not yet fully stabilised post-GFC”.
The economy still has to cope with the recent rate hikes, and Herston is sticking to its belief the RBA should stay on hold until mid-2011.
One must not forget the RBA looks closely at the global, and not just the domestic economy. Although China's PMI showed a turnaround this month the RBA has always assumed strength from Asian economies. It is a sliding US and a still fragile Europe the RBA will be keeping an eye on. With all the talk of double-dip, the RBA is not going jump at further monetary policy tightening too boldly.