In case you’ve only had a chance to read a headline or listen to a news grab on yesterday’s Australian economic data release, today, I’ll dig a little deeper.
The headline number came in at 0.9% for the three months to 30 September. This was better than expected and, annualised at least, represents a 3.6% growth rate.
But it wasn’t as good as it appeared. The healthy result came from an unusually strong contribution from ‘net exports’. This refers to the volume growth of exports versus the volume growth of imports.
During the September quarter, export volumes increased while import volumes decreased. This combined to see ‘net exports’ produce an exceptional contribution to economic growth. According to Peter Martin at Fairfax, it was the largest contribution in 15 years.
There is one thing about the headline growth number that you need to know though. It measures increases in production volumes. It doesn’t care whether the increase in volumes is profitable or not.
This is why the headline economic growth number is not a very good measure of the country’s economic well-being. It doesn’t reflect economic reality.
I’ll show you what I mean…
The strong growth in ‘net exports’ came largely from a hefty 4.6% growth in export volumes. My guess is that much of that came from iron ore volume growth, as well as the start of LNG exports. The problem though, is that the growth in export volumes was more than offset by a decline in the price received for said exports.
We know this because the trade deficit for the September quarter came in at over $7 billion. So while additional export volumes contributed to headline economic growth, in reality, we sold these additional volumes for less. This resulted in Australia generating a big trade deficit for the quarter, meaning more money flowed out of the country, despite the so called export boom.
But plenty flowed back in too, in the form of foreign creditors satisfying our demand for more debt. I’ll get to that in a moment.
But first, let’s look at the growth numbers when they actually take onto account the prices we receive for exports and the prices we pay for imports.
Along with a few other minor adjustments, this more realistic measure of economic performance is called ‘real net national disposable income’. It actually contracted 0.1% in the September quarter and 1% over the year. So on a more realistic measure of economic wellbeing, Australia is indeed in recession.
Not that you’ll read that in the mainstream news. Instead, you’ll get lazy analysis saying how strong the Aussie economy is, and how it continues to defy the pessimists.
The bottom line is that we remain on a trend to lower growth. Increased production volumes are all well and good but if they don’t provide you with a decent return on investment, they are useless.
It’s like a Chinese steel mill making more and more of the stuff while losing more and more money. Eventually it will go bust.
Which brings me back to the earlier point. While dollars flow out of the country due to the trade surplus, money comes right back in via foreigners lending to us. This supports consumer (and government) demand.
During the quarter, both households and government demand contributed to growth. But it wasn’t enough to offset the drag coming from investment.
It will be clearer if I show the percentage point contribution (positive or negative) from each sector, so you can see where the growth is coming from:
Starting from the top, household and government consumption combined provided 0.5% to the overall quarterly growth figure of 0.9%.
But that was more than offset by a fall in investment. ‘Dwellings’, which represent new home buildings, aren’t growing fast enough to contribute to economic growth. Non-dwelling construction reflects the ongoing fall in mining related investment. ‘Machinery and equipment’, which reflects general business investment, was weak too. In short, we’re consuming ok, but not investing in future growth.
‘Public’ or government investment spending fell sharply during the quarter too, and detracted significantly from growth. This is likely to be a volatile component, and should pick up during times of large infrastructure spending.
All this combined to produce a contraction in ‘gross national expenditure’. This measures the performance of the domestic economy without taking into account the effects of trade.
And as I mentioned, net exports (via more dirt and gas going to China) saved the day…or the quarter.
There is a bit of evening out to consider here. While the fall in mining investment detracts from growth, the pick-up in mining production (a result of the investment) adds to growth.
My gripe is that the headline figure doesn’t convey the quality of that growth. It suggests the Aussie economy remains strong. But selling more for less, and generating lower returns on investment, isn’t creating wealth.
The real measure of the Aussie economy is worse than the headline suggests. That’s not pessimism, that’s just reality.
There is one other thing to note from the numbers above. There is a lot of talk around about the economy rebalancing away from mining to other forms of investment.
It’s not happening. Housing construction isn’t adding to growth and has very likely peaked. We’re taking on more debt, which is supporting activity in the services sector, but that isn’t a sustainable form of growth.
The ‘rebalancing’ has come from mining production replacing mining investment. But thanks to the end of the commodity price boom, production is increasingly less profitable.
It’s likely we will have a scenario over the next year of semi-respectable headline economic growth, but the underlying picture will be much worse.
That’s why the Reserve Bank is still more likely to reduce interest rates than to increase them. And if recent house price falls continue into 2016, you can bet the RBA will prop up that sacred sector.
For Markets and Money