When do fairy tales become just bullsh*t stories?

When do fairy tales become just bullsh*t stories?

I have a Twitter bet going on…

An ex-colleague and I are punting on the Aussie economy.

The reward is a well-known Australian currency — a slab of the winner’s choice.

The bet?

Simple.

I reckon the Aussie economy will have two back-to-back quarters of negative growth this year, based on either third quarter or fourth quarter data. The technical definition of a recession.

My challenger?

He says the Aussie economy will have negative quarterly growth in the second and fourth quarter only. Thus, he thinks Australia will avoid a ‘technical’ recession.

We aren’t even three months into the year…and I’m starting to think we’re both wrong.

Fine. Everything is just fine.

Investors are easily confused.

Oh, don’t worry. It’s not your fault.

It’s the constant misinformation we all get fed.

Take our own central bank, for example.

Each monthly statement of monetary policy has reiterated the Reserve Bank of Australia’s long-held view.

The Aussie economy is gradually progressing. Unemployment is fine, inflation is fine, growth is fine.

For the past two years, the RBA has done nothing but reassure you the economy is just fine.

Every single month. 

I’ll be honest. I don’t know how the RBA gets away with being so misleading.

I mean, if that were me, I’d have ASIC knocking on my door, asking me to have a chat in a very small room, with lots of lawyers present.

But I guess when you’re the central bank you can tell the people whatever you want them to hear.

Whether it’s true or not doesn’t matter.

Let’s go through the actual numbers versus the PR spin we are fed.

Hard data without the spin

Way back at its November 2018 policy meeting, the RBA said Australia’s gross domestic product (GDP) would average 3.5% to 2020.

Almost exactly one month later, the latest GDP figures showed that growth had slowed at the sharpest rate on record.

Meaning Australia ended 2018 with year-on-year economic growth at 2.8%. Well down from the 3.1% we recorded in 2017.

Yet, here’s what makes the RBA’s November statement even more absurd.

In the first nine months of 2018, the Aussie economy grew at a rate of 2.2%.

And the RBA knew this.

Meaning the Aussie economy would have to grow at an unprecedented rate of 1.5% for the final three months of 2018. 

Let’s put that in perspective.

In the last 10 years, the highest quarterly GDP growth figure was 1.2% in the September 2011 quarter.

Almost every quarter since has seen economic growth below 1%.

In fact, if you average out the past 28 quarters since then, you get a figure of 0.55%.

That means the RBA has been bullishly predicting extremely strong economic growth for Australia…even when the numbers don’t support it.

That’s why investors are confused.

Our own central bank promotes the idea that we can have incredible economic growth when the numbers don’t stack up.

At what point does the RBA’s fairy tale economy become just some bullsh*t being fed to us?

Tick tock until the numbers drop

Why start your Monday with a central bank takedown?

Look, don’t get me wrong. It’s a favourite subject of mine, next to gold…

But this week is a week full of important economic decisions and data.

Tomorrow is the first Tuesday of the month.

This means the RBA’s pinstripe-suited boffins once again gather at Martin Place over lattes and muffins to decide the fate of the Aussie economy.

Here’s your insider tip: The RBA won’t be changing the current cash rate tomorrow.

Less than 24 hours after our central bankers meet, things will get interesting.

Come 11am on Wednesday, we will have Australia’s gross domestic product data for the December 2018 quarter.

Importantly, Wednesday GDP numbers will give investors yet another chance to see through the economic PR spin that comes out of our central bank.

When you read about Australia’s economic growth data, remind yourself that the RBA spent most of 2018 insisting that a 3.5% growth rate average was possible.

But if we use the RBA’s actual data, we can see a very different story playing out.

GDP growth yearly/quarterly 2002-2019

Source: RBA – Statement of Monetary Policy February 2019

Here’s the thing.

The chart above — which comes directly from the RBA’s most recent policy meeting — clearly shows that the Aussie economy isn’t growing anywhere near the rate it has been predicting.

Furthermore, it was at this meeting that the RBA revised its growth target for Australia down to 2.75% for 2018.

If I’m honest, even that is ambitious.

New housing build approvals have fallen. So has the amount of finance and the volume of housing loans.

Construction starts are down. Consumption is dropping. Wage growth is still stuck at 2.3% and the savings rate continues to drop.

The thing is, the December 2018 GDP figure is already looking bleak before we get access to it. If GDP data for the last quarter comes in at 0.5%, it will be an economic miracle.

The more likely outcome? It’s well below that…

The terrifying outcome, though, is that GDP for December last year is negative.

That means I won’t get my slab.

And — on a much more serious note — if the Aussie economy did go backwards last year…we are in a lot more trouble than I thought.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

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