Ignore the attempts to find a downside to yesterday’s GDP figures — they were very good news, achieved in the face of real difficulties in the international economy. But, inconveniently for the government, they were delivered under policy settings that the Coalition now says are a huge impediments to growth.
Believe it or not, our first-quarter growth rate of 1.1% was as strong as China’s, as reported in April. It was also the strongest annual growth in four years (3.1%) in the year to March. And yes, it was driven by strong commodities exports — but so what? “Exporting our way to growth” used to be considered a good thing, and it’s the upside of the end of the mining investment boom that is pulling down private investment. And that export performance is despite Australia copping a whacking from plunging export prices — our terms of trade fell 11.5% in the year to March, adding to a 26% fall in the past two years, as well as a plunge in our key export, iron ore, to US$38 or so a tonne late last December. Oil prices have fallen, along with LNG prices, while copper and coal are weak. But as always, the weaker Australian dollar has helped offset the full impact of the collapse in our terms of trade, softening the blow. That’s exactly how it’s supposed to work.
This is a resilient economy — it has also survived two and a half years of the dollar over greenback parity (US$1) from November 2010 to May 2013. Since December 2008, we have had only two quarters of negative growth: December 2008 and March 2011 (originally reported as a fall of 1.2%, now revised down to just 0.2%). And when was the last time Australia’s economic growth rate has risen as quickly as global growth has slowed? The current IMF forecast for global growth in 2016 is 3.2%, down from 3.4% in January and only just ahead of our March quarter result. There’s other good news as well. Labour productivity has improved as real unit labour costs have remained virtually steady for the past four years. And non-mining business investment is re-emerging: this week’s private capital expenditure data for the March quarter showed higher planned spending from manufacturing and service sector industries than a year ago and in the first estimate for 2016-17 issued in February. It is not a big increase, but it’s there.
Much of the credit for the result belongs to the RBA. Its two rate cuts in 2015 now look to have been spot on, helping spark an upturn in jobs growth and demand in the economy in the last half of 2015 and into early 2016, without sparking a wages or inflation surge. Those commentators who argue about the softness of the figures and the weakness of demand miss a very important point — economies never fire on all cylinders at once, and nor do regions (see that silly story on Page 1 of the Fairfax tabloids today about the uneven nature of economic growth). Remember the two speed economy of the mining investment boom when Western Australia and Queensland were going gangbusters? Now it’s booming NSW and Victoria while WA and Queensland deal with the post-boom letdown.
The current NSW and Victorian governments also deserve credit for using fiscal policy in the manner recommended by the Reserve Bank, to fund a pipeline of quality infrastructure projects. Both have kickstarted heavy infrastructure spending programs that will last for years — in contrast to the “infrastructure prime minister” Tony Abbott, under whom infrastructure investment collapsed, and to Malcolm Turnbull, whose primary public policy achievement so far is to wreak havoc on the NBN and cut spend infrastructure spending in the 2016-17 budget.
Oddly enough, this strong result has been achieved with a corporate tax rate of 30% (much higher than Canada’s, a country we are growing twice as fast as, as Treasurer Scott Morrison pointed out yesterday), under Labor’s Fair Work Act, in the absence of an ABCC (the trigger for this long, boring election) and with a level of tax:GDP nearly a full percentage point higher than when Labor was in office. And all of the mining projects now pumping out exports were commenced when Labor was in office and — despite the hysterical claims of the mining sector and the Liberals — Australia was declared by independent analysts the greatest place in the world for mining investment.
It’s true that it’s not all perfect in the data — but then, it never is. The biggest worry for whoever forms government after July 2 is weak nominal GDP growth — it was 2.1% in the year to March, up from 1.8% in the 2014-15 year, but still well short of the budget target. And iron ore prices fell under US$49 a tonne overnight to US$48.80, well under the US$55 estimate the budget was based on. The saving grace is that instead of an exchange rate with the greenback of 77 cents, as used for the budget, it is down at just over 72 US cents. And a rate rise in the US this month or July, and another at the end of the year, will be quite unnerving for many in Australia but will help push the dollar down further.
The housing/apartment building boom, engineered by the RBA’s rate cuts, has been the major support for the economy’s transition, but like all booms, it contains the threat of collapse. House prices are continuing to rise in Sydney and Melbourne and if they don’t ease soon, the RBA and its co-regulator, APRA, will be forced into taking action. Household debt remains very high and a potential weight on the economy if for whatever reason, our growth phase should stumble. But offsetting high debt is low interest rates, and the two years or more of fat that mortgagees have built up in their bank accounts as they pay off their home loans faster than they have to.
The problem with yesterday’s result — which of course is backward-looking, so not to be taken as a guide to how the economy is performing now — is that it was in no one’s interests to say how good it was. Not the media, which wants to concentrate on bad news, not the opposition, which wants to avoid suggesting the government has managed the economy well, and not even the government, which is insisting changes like $50 billion in company tax cuts and draconian anti-union bodies are needed to save the economy.
Crikey is committed to hosting lively discussions. Help us keep the conversation useful, interesting and welcoming. We aim to publish comments quickly in the interest of promoting robust conversation, but we’re a small team and we deploy filters to protect against legal risk. Occasionally your comment may be held up while we review, but we’re working as fast as we can to keep the conversation rolling.
The Crikey comment section is members-only content. Please subscribe to leave a comment.
The Crikey comment section is members-only content. Please login to leave a comment.