Macro

There is no doubt the Australian economy was weaker in late 2018 than it was during the first half of the year. It seems to have kicked off 2019 on a similarly weak note. Recent economic news has been unambiguously poor and it follows the dismal GDP results released last month which showed per capita GDP falling 0.1 per cent in the September quarter. That was a poor result and forced most thinking economists to revise down their assessments of Australia’s economic health.

If the upcoming December quarter GDP result, which is due for release in early March, reveals another drop in per capita GDP, the economy on a per capita basis will be going backwards.

This, quite clearly, is not good news.

It means living standards for the average Australian are falling and it poses questions about the current stance of economic policy.

In other words, with living standards falling, do policy makers have the right policies in place that will reverse this downturn and deliver a resumption in growth?

The short answer is ‘no’.

Policy settings are wrong for a scenario of stronger economy, including importantly per capita growth and a reflation of the economy.

By way of background, the average annual rate of per capita GDP over the past 30 years have been 1.84 per cent or about 0.46 per cent per quarter. Population growth means that the long run trend growth for top-line GDP is over 3 per cent in annual terms and around 0.75 per cent on a quarterly basis.

Back to current economic conditions.

The data looks weak

The data flow for the December quarter looks weak, even with the population growing by about 0.4 per cent in the quarter.

New car registrations are falling at an alarming rate and will mean both household consumption spending and business investment will be tilted to downside when the GDP data are published.

Retail sales for both October and November were soft despite the Australian Bureau of Statistics noting that the November result was artificially inflated by the Black Friday sales. The stage is set for a low growth rate for household consumption spending in the December quarter.

What’s more, residential building approvals are in free fall which will undermine growth as new construction declines.

The monthly international trade for October and November suggests net exports trimming about 0.2 percentage points from December quarter GDP, as solid export growth is being outpaced by a pick-up in import growth.

To be sure, there is still a run of information and data on some of the monthly indicators plus the quarterly data on government spending, business inventories, investment and household spending on services are to be revealed. These will all feed into the final December quarter GDP result and they may yet prove to be positive.

Even if these indicators surprise on the upside, per capita GDP in the December quarter will grow by 0.2 or 0.3 per cent.

If there is any disappointment in the remaining data flow, per capita could fall 0.2 or 0.3 per cent, meaning consecutive quarters of negative growth.

What next for our economy?

The markets will be awaiting each data point between now and the next GDP data with huge interest.

Either way, there are serious questions about the current stance of economic policy.

The market has gone from pricing in interest rate hikes a month ago, to now be squarely pricing in interest rate cuts, such is the obvious concern with the economy.

At this stage, there has been no word from the government about the need for any stimulatory fiscal policy action, in part because of the proximity of the election, which is due to be held by May.

It may be up to the new government, which ever side wins in May, to dust off fiscal policy and look for a bit of stimulatory fiscal policy to ensure the weakness evident in the second half of 2018 does not become entrenched through 2019 and into 2020.

It should also fall to the RBA to cut interest rates sooner rather than later to help support the increasingly troubled economy.



Comments

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Ian

Seriously, you are arguing for Australia to use our last remaining stimulus in a time when the economy is still expanding? If interest rates are at 1% when the bad times really arrive, what do you propose then? The argument for macro intervention is supposed to be two-sided - in good times we are supposed to build up the buffers so that they can be deployed when things turn ugly. If interest rates had been gradually raised a few years ago, we would not have built the housing bubble which we are now so concerned about preventing from popping. Unfortunately it appears that the economists of today think they can outsmart the markets, which I have absolutely no doubt will be proven to be devastatingly wrong in years to come.