Recently the Unconventional Economist noted that Alan Kohler has come around to the MB view of the Australian economy. Now, another grey beard of Australian business commentary has given up on Australian exceptionalism: Ross Gittins.
Regular readers will know well the chagrin with which MB has observed the work of Gittins over the past year. Gittins is traditionally one of the most innovative and interesting story tellers of the Australian economy but for the past year he has struck a steadfastly official line that Australia is different and separate to the woes afflicting much of the Western world. Some of that spirit remains but on Saturday he penned a welcome reversal of recent analysis that endorsed the MB view of the world (even if he didn’t say so!).
For weeks the Reserve Bank has been telling us the economy is growing at ”close to trend”, but the indicators we got this week leave little doubt we’re travelling at below trend.
Had the Reserve’s forecast of growth in real gross domestic product of 2.75 per cent over the year to December been achieved, this would indeed have meant the economy was expanding at close to its medium-term trend rate of growth.
But this week’s national accounts showed GDP growing by a weak 0.4 per cent in the December quarter and by just 2.3 per cent over the year to December.
Something else the Reserve has been saying is that the economy’s being hit by two huge, but opposing, external shocks: the expansionary effect of our high export prices and all the spending being undertaken to expand our mining capacity, but also the contractionary effect of the high exchange rate, which has reduced the international price competitiveness of our export and import-competing industries.
The economy’s below-trend growth suggests the contractionary force may be gaining an edge over the expansionary force. This increases the likelihood of another cut in the official interest rate before too long.
It’s important to recognise, however, just why the reported weakness in the March quarter occurred. The greatest single reason was the utterly unexpected fall of 1 per cent in business investment spending. This is actually good news in the sense it’s a blip that won’t be repeated this quarter. We know the mining construction boom has a lot further to run.
This is a huge backflip and most welcome. Gittins has been one of the main cheerleaders for “adjustment” to mining led growth, consistently arguing that those concerned with Dutch disease are hand wringing. He’s been especially harsh on suggestions that jobs growth in the inflating sectors would be insufficient to offset weakness in deflating sectors.
Yet, despite the backflip, Gittins is still holding to hope. The notion that the fall in business investment won’t be repeated is illogical. As I said this week, volatility in the aggregates is exactly what you’d expect when you base your growth around a single industry that is itself driven in large measure by a hand full of enormous projects. And that’s before we add in the dependence on just two commodities and one country for external demand. Make no mistake, on the current settings, volatile growth is our future.
But the best of the return of Gittins is yet to come:
If you listen to the retail industry’s propaganda you could be forgiven for thinking weak consumer spending must be a big part of the story. Even the Treasurer, Wayne Swan, is still banging on about the ”cautious consumer”.
But though it’s true the growth in consumer spending of 0.5 per cent is on the weak side, consumption nonetheless contributed 0.3 percentage points to overall growth in the December quarter.
And over the year to December consumption grew by 3.5 per cent – that’s definitely ”close to trend”. If consumers really were being cautious we’d be seeing this in a rising rate of household saving. In truth, the rate dropped a little in the December quarter.
But when you look through the quarter-to-quarter volatility, it’s clear the saving rate has essentially been steady at about 9.5 per cent of household disposable income for the past 18 months. That’s not cautious, it’s prudent.
To say consumers are cautious implies that when their confidence returns they’ll start spending more strongly. That’s a misreading of the situation. Their spending is already growing at trend. They’ve got their rate of saving back to a more prudent level after some decades of loading up with debt, and from now on their spending is likely to grow at the same rate as their income grows.
What’s wrong with that? Nothing. If it leaves the retailers short of customers, that’s their problem. Don’t be conned: in a market economy, the producers are meant to serve the consumers, not vice versa. If the retailers are selling stuff people don’t want to buy – or at prices people don’t want to pay – the retailers have to adjust to fit.
We don’t have a problem with weak consumer spending; the retailers, who account for less than a third of all consumer spending, have a problem because consumers have switched their preferences from goods to services.
Regular readers will recognise that this is an entirely new line for Gittins. He has until now maintained what I’ve described as the “campaign for national ignorance”. In it he argued that the only thing holding consumers back was a lack on confidence, much the same line taken by Wayne Swan. To boost that confidence he advised ignoring concerns about debt saturation emanating offshore. We were talking ourselves into recession and losing our “animal spirits” he said. I take issue with the idea that consumers are somehow choosing this path, as opposed to being corralled into it by the RBA and global markets. Moreover, if spending on services is displacing goods, I suspect that’s because services are increasingly expensive, not because we’re consuming more of them. But Gittins’ new position, that we need to save, is nonetheless very welcome.
Again, although he can’t bring himself to actually say so, Gittins has traced out all of the structural shifts that have preoccupied MB over the past year and a bit: Dutch disease, mining-led growth, disleveraging and peak debt. Perhaps now he can begin to ask the questions that the nation desperately needs from him. What are the prospects for an economy overly exposed to commodity fluctuations? How can fiscal tools can be employed to contain such volatility? What does it mean that we still run a current deficit in the midst of the greatest export boom in our history? Is deindustrialisation really a free ride? What should we be doing about monetary policy tools being dated in the sense that they promote borrowing when prudence is advised?