The End of Australia’s economic fairy tale

The End of Australia’s economic fairy tale

I step away from the macroeconomic commentary for one minute and suddenly all the papers are stuck on the same subject. Interest rates.

The past week of financial commentary has been filled with guesstimates of what the Reserve Bank of Australia might do next.

Now, I’ll admit, they aren’t the most interesting subject.

But there I was last week, poolside at a Bali resort, when I discovered it.

It didn’t matter which site I flicked too.

They were all talking about the same thing.

It stumped me. It’s not often that the financial rags are in sync like that.

Yet here they were, chewing over and over about what might happen.

Slow news day, maybe?

Or, more likely, it had finally dawned on them.

The Aussie economy is not okay.

Central bank out of touch with the market

So why all the fuss?

Gross domestic product data.

Yep. That precious number we get each quarter that tells us how well the Aussie economy is doing.

Or in this case, not doing.

You see, the September data drop showed that our GDP came in at 0.3% for the quarter. Which was half the expected 0.6%.

Taking our annual economic growth rate down to 2.8%.

It fell way short of market expectations.

And when I mean market expectations, I really mean that all the economists surveyed by Bloomberg tipped a median increase of 0.6% for the quarter.

However, the reason why the GDP was a hot topic is because it was a ‘right punch, left hook’ market beat up.

You see, the June quarter data was 0.9%. So, not only was September one-third of that figure, but all the professional market forecasters got it wrong.

Waaaay wrong.

And the data was all the more topical because of what the Reserve Bank of Australia had said only 24 hours before the data was released.

In a crowded room, the RBA had confidently told the audience they expected our annual economic growth rate would remain at 3.5%.

Well, well, well.

First the economists, now the central bank.

Do you know what this reveals?

It tells us exactly how out of touch with reality the RBA is. And just how clueless the market ‘experts’ really are.

The problem here is this tells us that industry professionals have completely misread the tone of the market.

That, perhaps, our own central bank’s statements of monetary policy each month are nothing more than a fairy tale.

Leading some of the mainstream economic commentators to start questioning whether this will change the RBA’s stance on rates.

My answer to you is, it will.

Although the RBA will be the last ones to admit it.

Mainstream just woke up

Actual economic growth appears to be significantly far away from projected economic growth.

This is the reason why the mainstream were stuck on chewing over the GDP data.

What we’re told and what we got are two totally different things.

And while the signs that the Aussie economy isn’t healthy have been increasing, they weren’t obvious.

An unexpected drop in data that no one saw coming is a wakeup call.

It’s the signal that everything isn’t okay with the Aussie economy. That, perhaps, the rosy forecasts from the RBA have been masking the sinister truth.

They have ignored the impact that low wage growth, increased personal credit and falling house prices have had on consumer spending.

To keep the Aussie economy out of a recession – notice I didn’t say healthy – consumer spending is vital.

Not only that that, but consumer spending in Australia has long been propped up by credit.

The fall in GDP data was largely driven by less consumer spending. Yes, mining was up. So was government spending on infrastructure. But both of those sectors add less than 15% to the total GDP figure.

People spending money accounts for almost 60% of total GDP.

But we can feel the decline. People are spending less.

Our country isn’t recovering, or growing.

For the past year, the Reserve Bank of Australia has consistently turned out rosy reports reassuring us that the Aussie economy is ‘on track’. Or whatever bland cliché they have used.

Yet all those speeches and all those reports having been masking the sinister truth.

That the Aussie economy isn’t in recovery mode.

That things aren’t going so well after all.

And the rest of the mainstream have just woken up to this now.

I hope you’re ready for the downturn.

Best Wishes,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia