GDP brainwashing kicks into gear

Changing the goal posts is what the housing obsessed Australia does best. Whatever it takes to keep the confidence fairy fluffed. It’s usually the endless GDP record that is trotted out. But the usual brainwashing has reversed today:

The message from the Reserve Bank is clear.

Don’t panic if the economy slowed down in the first quarter of this calendar year. Don’t worry about low inflation and don’t even fret over employment numbers.

Indeed, don’t get caught up in the noise of the day-to-day economic releases. Look down the track. It’s all going to be fine.

Investors may be confronted with news the economy went backwards in the first three months of this calender year as early as Wednesday.

But that won’t faze the RBA.

Governor Philip Lowe, in the accompanying statement to Tuesday’s decision to keep the official cash rate steady at 1.5 per cent, flagged the possibility of a slowdown due to movement in quarterly figures.

He is very confident that over the next few years the economy will be growing at more than 3 per cent.

From the Treasurer:

With economists forecasting a sharp collapse in first-quarter economic growth figures due out on Wednesday, Mr Morrison moved to pre-empt the bad news, saying it had already been factored into last month’s federal budget.

“In the budget I foreshadowed weaker outcomes in the current year, as a result of the anticipated negative impact of temporary weather-related factors,” Mr Morrison said late on Tuesday.

There were several reasons to be more “optimistic about the days ahead”, he said and declared his more conservative near-term outlook to be consistent with the views of the Reserve Bank, bodies such as the IMF and OECD, and private economists.

Signs of a slump in household spending have raised fears the economy started into 2017 with a whimper, while figures published on Tuesday showed that a decline in export volumes – despite higher global prices for commodities – may have wiped 0.7 percentage points from GDP growth in the first quarter.

From The Pascometer:

So if the March quarter national accounts are mainly a matter of historical interest, what counts in the year ahead?

Well, statistically, mining will be back to normal and no longer a drag. Anecdotally, the need for maintenance investment in resources could prove a little positive.

Housing construction is peaking, but the inevitable downturn is more than compensated for by an infrastructure construction boom that is yet to be fully reflected in the numbers.

There has long been a disconnect between household consumption and retail sales. That disconnect is becoming greater as we spend proportionately more on services and non-retail pleasures and necessities – education, education, housing, international travel, energy.

Our services industries continue to move forward very nicely indeed. Education is in for a bumper year, partly thanks to Donald Trump encouraging more foreign students. We in the early days of a tourism boom if only we can be smart enough to invest to service it.

…The game ahead is still positive, whatever the March quarter score might have been.

All Domainfax drivel all of the time. As said many times already, Q1 GDP is weather impacted. Q2 will also be weather impacted, probably worse so. A ‘technical’ recession (however meaningless) is even possible.

But these are not the issue. If you want to look forward you need to consult the drivers of growth and they are sickening as:

  • mining capex will keep falling (Ixthys, Wheatstone and Roy Hill construction is yet to wind down);
  • wider capex growth slows as the consumer crunch continues;
  • the consumer crunch continues as the housing bubble comes under ever more regulatory pressure and the income shock worsens;
  • national income is smashed by the ongoing collapse in the terms of trade to new lows in 2018;
  • the car industry shutters;
  • the gas shock gets worse;
  • housing construction rolls over.

Yes, there’ll be some offset in public investment but nowhere near enough. Net exports will rebound as we pass the weather distortions (at which point pro-GDP brainwashing will resume) but that does nothing to add to local employment. The opposite in fact. And so the jobs market will weaken.

The only way to turn this around is to add more stimulus which will come when the RBA is satisfied housing has a sufficient dent in it.

When it comes it will, of course, be a terrible shock that nobody foresaw.

Rinse and repeat all the way down.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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