Two and a half things about Q2 Aussie GDP

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The Q2 National Accounts were around expectations, printing at +0.6%q/q, and +3.7%y/y. This is just about exactly on the RBA’s 3.75%y/y forecast in their Q3 SOMP. At the margin, non-farm GDP was a touch weaker than the RBA forecasts (rounding down to 3.5%, rather than up to their 3.75% forecast) – however this is an immaterial miss.

As has been the case for most of 2011-12, Q2 GDP was significantly boosted by Government spending. The +1.9%q/q increase in Government spending in Q2 (+2.8%q/q for capex and +1.6%q/q for consumption) added ~45bps to growth; about twice the size of the ‘normal’ contribution from Government spending.

It seems pretty sure that Government spending growth will at least slow down in 2012-13, and most certainly contract in Q3’12. This means that the private sector must accelerate to fill the gap.

I had expected that the consumption of government transfers and the income boost from the ‘tax cut’ we all got as the Qld flood levy rolled off would mean that private demand would firm in H2’12. The partial data we have for Q3 suggests I was wrong — private demand has been weakening.

Retail sales fell 0.8%m/m in July, and the August AIG Services index fell 4.1pts to 42.4 (taking the 3mma -0.4pt to 45.9).

While we are on business surveys — it’s worth pointing out that there is less conflict between these surveys and the National Accounts data than most claim. It’s just that folks are looking at the wrong thing!

The fact is that firms live in a nominal world – business surveys tell you how business is feeling, and business feels good when profits are rising. Thus, we find that the business surveys tend to be firm when NGDP growth is above average, and weak when NGDP growth is lower than average.

Non-farm NGDP growth was 1%q/q in Q2, and 3.3%y/y. This compares with a 15 year median ~1.75%q/q and ~7%y/y. It’s no wonder that earnings are disappointing, and that firms are grumbling. If the terms of trade keep falling, NGDP is likely to as well.

I never brought into the line that the mining boom was something that happened to other people in some other place – it lifted all sectors … and if the boom turns to bust, it’ll depress the economy in a similarly broad fashion.


  1. Lowest NGDP in 20 years outside the GFC. What is stopping the RBA from offsetting the negative shock from falling ToT?

    1. The unemployment rate of course. If that pops to 5.4% tomorrow, perhaps they cut in October. However my guess is that they await more data. Nov seems much more likely to me. If they downgrade their GDP forecasts, they will cut.

      1. Holding the participation rate constant, I think Bill Evans has said that unemployment would be 5.8% (before today’s numbers).

  2. Exactly. Has also always also been my view that if the boom busts the impact will be economy wide. Delusional Economics (writes at Macrobusiness) and has had some excellent posts on same. Putting it simply, the boom was our point of differentiation from most other high private debt low growth prospect developed economies Take it out of the equation and why should we fare any better – in fact our very high levels of private debt potentially make it more problematic (Spain!)…then again, lowish public debt will give room for mediation.

    1. His were fair points.

      But i think the key measure is not aggregate debt, but debt that does not pay off as expected (this is where Sumner is dead right — it is investments that do not pay the expected returns that hurt).

      I think our best point of differentiation is that our investment boom was mostly equity financed.equity can be written off – it is debt finance that makes pain.

      The bust caused huge wealth destruction, but only modest real economic damage – the tech boom was equity financed and i suspect that is why the post-crash period caused only modest real damage.

      Hopefully our houses are in stronger hands than Spains – being an owner occupier market with a growing population ought to help.

      If indeed it is busting. It is too soon to be certain about that. We may be getting ahead of ourselves. Hope we are.

      1. Should housing really go bust here in Australia, we are in for some big trouble… there’s A LOT of businesses that are profitable / feasible ONLY because real estate has been appreciating significantly in the last decade. Take that away, and they have no business model at all to survive.

        1. good point. i can add that to the worries i have about a credit crunch as most SMEs collateralise their lending with the family home. It will also really mess with state government funding, as they depend on stamp duty – and when house prices go down, folks just stop trading houses.

    2. A weaker AUD will be very positive for many businesses, more than the “mining boom”. The problem is if the AUD does not weaken while commodity prices come down…. but I do not think that will happen, it will only take time.

      Regarding GDP growth and business surveys: GDP growth has been driven mainly by mining and the mining states, but some other parts of the economy are even in recession, these graph are clear:

      1. thanks. I really rate Mark’s blog. Tasmania is clearly in recession. The department store collapse last month was very interesting. It is basically a population measure – in theory it’s completely enumerated – so the drop is probably real. could be something due to the timing of sales and seasonal factors – but the long downtrend just speaks to structural change in my view. Looks like the internet killed Mr Jones…

  3. Agree on Mark’s blog.

    Like this, fantastic.

    On housing the RBA has been quite firm people who are worried are looking at the wrong data. I agree.

    On commodity prices there is more than Iron Ore.

    1. I agree that the probabilities of a housing bust in Australia are quite low, but we learned that the damage, should that happen, is very high and should not be underestimated.

      It’s already worrying that interest rate seem to be peaking at lower and lower levels and we seem gravitating towards zero like the rest of the world.

      Re RBA forecasting, have a look at this, Luci Ellis, December 2006.
      It’s about rising house prices in different countries. You would not believe how wrong they were:

      “The most important lesson to draw from recent international experience is that a
      run-up in housing prices and debt need not be dangerous for the macroeconomy,
      was probably inevitable, and might even be desirable. As emphasised by the BIS
      Committee on the Global Financial System’s Working Group report, the expansion
      in household borrowing has in many cases reflected better pricing of risk and credit
      scoring, implying that credit is being allocated more efficiently than in the past.
      This should improve the economy’s resilience to adverse shocks. In addition, the
      product innovation summarised in Table 1 implies that households now have
      greater choice about the kind of mortgage they take out, which ought to be welfareimproving.

      If a macroeconomic downturn were to occur, it could be exacerbated by a correction of an extended housing boom. However, the experience of Australia and the UK seems to suggest that booms in housing price growth can subside without themselves bringing about a macroeconomic downturn. In Australia, nationwide average housing prices fell for around two years from about the end of 2003. Household consumption growth did slow during this period, but from rates that were unsustainably strong (Figure 6). The picture for the UK was similar, even though it did not benefit from the cushioning effect on incomes from the sharply rising terms of trade, as Australia experienced.

      These relatively benign outcomes point to the underlying robustness of the
      financial systems in these economies. Even where there was evidence of
      speculative demand (or panic buying), and an apparent belief in some quarters that
      housing prices never fall, households adapted to the turn in the market reasonably
      well. Although there have been anecdotal reports of home buyers experiencing
      negative equity, it seems that much of this can be attributed to the normal
      idiosyncratic risk inherent in a heterogeneous product like residential housing……. etc etc

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