The lucky country just keeps getting luckier!
Yesterday, the Australian Bureau of Statistics (ABS) revealed the Aussie economy grew 0.5% in the June quarter and 3.3% in the 12 months to 30 June. Just as well the RBA cut interest rates earlier this year, huh?
Ironically, the RBA’s cuts are probably fuelling the dollar’s rise…completely opposite to the intended effect! That is, the economy appears to be accelerating while the RBA is cutting rates at the same time, giving added impetus to the economy, which increases demand for the dollar!
‘Appears’ is the operative word here, though. As I’ll show you in a moment, the headline growth number masks a weak underlying economy. That’s why the Aussie dollar actually sold off yesterday, albeit only slightly.
Before getting into the details, let’s have a look at a better measure of economic growth, something the ABS calls ‘real net national disposable income’. This measure also takes into account the effect of the terms of trade, which adjusts growth for the price changes in our imports and exports.
On this front, the economy grew 0.6% in the quarter and is up 2.3% for the year. Previously, this measure reflected an Aussie economy perilously close to recession. But thanks to China’s stimulus earlier this year, which provided a big increase to steel production and, therefore, iron ore prices, Australia’s terms of trade increased significantly in the quarter.
Lucky, huh? This is why you need to keep an eye on China.
OK, let’s break the headline numbers down and see where the growth came from. In short, it looks like the bulk of the growth came from government spending and investment.
Which is weird, right? All you hear is how the government is trying to get back to surplus, and how it needs to cut spending.
Yet in the June quarter, government spending rose 1.9% (a whopping 7.6% annualised), while public investment jumped 15.5%. These two measures alone contributed one percentage point to the quarterly growth rate.
The continued fall in mining investment subtracted 0.8% from the quarterly growth rate, while net exports also weighed on growth. But this followed an unusually strong contribution in the March quarter.
But let’s get back to government investment growth of 15.5% for the quarter (62% annualised!). What is that about?
The ABS had this to say:
‘Public investment increased 15.5%, driven by State and local general government (21.0%). In part this reflected the transfer of assets from the private sector, which contributed to a fall of 3.4% in Private investment.’
I really don’t know what that means, apart from it being asset shuffling that contributes to economic growth.
Treasurer Scott Morrison, via a report from The Guardian, reckons the boost came from drugs and defence spending:
‘At a media conference in Canberra, Morrison said public final demand had been boosted by the government listing hepatitis C drugs on the pharmaceutical benefits scheme and the $180m procurement of Chinook helicopters.’
Whatever the case, it’s clear that the big government contribution was the main factor behind the strong headline growth number. That shouldn’t be a reason to celebrate.
Looking beneath the surface, there is reason to believe the economy is still in a low growth mode. The quarterly rate of growth slowed to 0.5% in the June quarter, half of what it came in at during the March quarter. That’s just 2% annualised.
And consider that, for the four quarters prior to this one, government spending and investment contributed an average of just 0.2% to quarterly growth. Applying this average to the June quarter would’ve resulted in the economy contracting by 0.3%!
Confirming the weak underlying growth picture, household consumption grew at just 0.4% for the quarter, the lowest rate of quarterly growth since June 2013. Household consumption has been the driving force of the economy for the past three years. If the slowdown in growth continues, we could well be in for a negative quarter of growth by the end of the year.
In case you were in any doubt about which sector is driving growth right now, the ABS points out that ‘property operators and real estate services’ had one of the highest industry growth rates. The sector grew 8.6% in the year to 30 June, second only to mining (9%), which is now slowing from a production surge earlier in the year.
Once the dust settles on this data release, the market is likely to continue to show concerns about the sustainability of economic growth. A strong dollar is no doubt hurting. Exports should provide some growth, but the slowdown in household spending is the major concern. The resilience, or otherwise, of the consumer will be the major focus from now on.
That’s because mining sector investment will continue to detract from growth for the next few quarters. Household/apartment construction has likely peaked, although it may continue to grow (at a slower rate) for the next few quarters.
Household consumption is tied to wages growth and the wealth effect. Wages growth is non-existent, which means Australia continues to rely heavily on house price growth to make people ‘feel’ wealthier (at the expense of those increasing debt).
This reliance on households has ‘helped’ the economy grow over the past few years. It’s also helped net foreign debt rise above $1 trillion dollars, making our chronic current account deficit even more chronic.
But you never hear about the flipside to debt-dependent consumption growth. It’s not a pleasant story.
Anyway, with household spending a concern, expect the RBA to continue flogging the dead horse that is the interest rate. All these rate cuts while household consumption continues to decrease?
Something is badly wrong with the Aussie economy. Yet we choose to celebrate ‘strong’ numbers based on unsustainable government spending, rather than addressing the looming problems we face.
Lucky, or wilfully ignorant?
For The Daily Reckoning