Why GDP Growth Figures Aren’t as Good as They Seem

The figures for GDP growth for the first quarter are out. The results show that the Australian economy grew by 0.9% in the first three months up to March. That was better than what economists expected. They had originally penned first quarter growth to hit between 0.5-0.7%.

On paper, that makes the 0.9% growth rate a step in the right direction.

The problem is that the economy will struggle to keep up that level of growth for the rest of the year. Why? Because we’re living in desperate times. The things that made Australia so resilient for the last 15 years are falling by the wayside.

The mining boom is well and truly over as China’s residential and commercial construction slows.

If the 0.9% growth rate kept up for the next three quarters, we’d be looking at economic growth of 3.6% in 2015. That would put the economy closer in line with growth rates of decades past. But since those days are long gone, that target is unrealistic.

We haven’t seen growth rates of over 3% since 2012, and we’re not likely to again. There are clear signs that the first quarter figures will be a one off this year. What follows for the rest of the year could make the first quarter look amazing by comparison. Let me explain…

Why growth rates could be much lower in the next three quarters

The Australian Bureau of Statistics revealed figures highlighting the problems facing the economy. And they prove why growth is likely to be subdued for the rest of the year.

Let’s start by looking at disposable household incomes. ABS figures show that, nationally, disposable incomes grew by 0.1% in the first quarter. But year on year, they’re down a disappointing 0.2%.

Disposable incomes are important for determining future household spending habits. With household spending falling, there’s nothing to suggest it will start growing again. And if people have less to spend — or they feel they’ll have less in the future — their spending habits will reflect that.

That’s important because consumer spending contributed to 0.4% of the growth for the quarter. Roughly speaking, consumers contributed to half of all economic growth in the first quarter. If households feel their disposable income isn’t rising, it’ll make it harder to repeat 0.4% growth again this year.

The other half in growth came from a 0.5% rise in net exports. But that’s at risk of dropping over the rest of the year. Why?

The terms of trade fell by 2.9% in the first quarter. Over the last 12 months, the terms of trade has fallen by 11.4%. This measures the total value of Australia’s exports against total imports. In other words, our level of imports are rising as our exports fall. So we can’t rely on exports to keep the trade surplus as high as its been in the past.

Finally, investments by households, businesses and government fell by 1.2% to March. Total spending in the economy has fallen by 3.4% in the past year. That’s going to hurt both net exports, and consumer spending. Let’s look at those briefly in isolation.

Why spending is falling across the entire Australian economy

Household spending has fallen because, as we’ve seen, disposable incomes are being stretched.

Business spending has dropped because businesses see little prospect for future growth. If consumer demand for goods remains stagnant, businesses have little incentive to spend too. Right now businesses see poor prospects for consumer spending. That’s why they plan on cutting expenditures by $104 billion in 2015–16.

As for the government, their spending falls in line with the mining industry’s woes. As revenues have plummeted amid falling commodity prices, government revenues have taken a hit. The price of minerals like iron ore, while recovering to US$63 a tonne, are still dragging on government revenues.

As with other industries, spending across the mining industry is set to fall significantly over the next year, as exporters cut back on capital projects.

Throw in a dollar that can’t seem to fall below $0.75, and you have a mining sector that whose contribution to economic growth will remain, at best, stagnant.

These factors, viewed collectively, provide a clear picture for the Aussie economy. It’s not a future with quarterly growth rates of 0.9%. Instead, we’ll be lucky to see growth climb above 0.5% again this year.

Mat Spasic,

Contributor, Markets and Money

PS: The Daily Reckoning’s Greg Canavan believes that the days of economic growth are over. In fact, he thinks that we’re set for a period of economic decline. As one of Australia’s leading investment analysts, Greg is convinced that Australia faces a recession in 2015.

The evidence is stacking up. Mining-oriented Western Australia  shrank by 1.8% in the March quarter. If you only looked at non-export economic activity, WA would already be in a recession now.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why our economy is in the hole it is. He’ll show you why debt levels are so out of control — and why that means a recession is inevitable. And he’ll prove to you why the RBA realise the recession is coming. Download your copy today and Greg will show you what you can do to protect your wealth from the fallout of the recession. To find out how to download his free report right now, click here.

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