HSBC: If you want to gauge how the Australian economy is faring, ignore GDP

Miguel Riopa/ AFP/ Getty Images

If you want to know how the Australian economy is faring, don’t look at the official GDP figures released by the ABS.

That’s the view of Paul Bloxham, chief Australia and New Zealand economist at HSBC, who says the NAB’s monthly business survey is a far better guide as to what’s happening in the Australian economy at present.

Here’s why he thinks you should watch NAB’s take, rather than GDP.

Today’s NAB survey showed that business conditions remained around post-Global Financial Crisis highs in May. Although business confidence ticked down, it is well above average. This is a very different message from that portrayed by real GDP growth, which year-on-year, ran at its slowest pace since 2009 in Q1 2017. Business conditions are more akin to the nominal GDP numbers, which are running at their fastest pace in over five years. This makes a lot of sense, given that nominal GDP is being driven by strong growth in corporate profits.

The May business survey showed that strong business conditions are being support by good trading conditions and employment. As we have been pointing out for some time, the employment indicator in this survey may also be doing a better job of measuring labour market conditions than the official labour force survey, which has also had significant measurement issues. The NAB survey employment measure is more aligned with the job advertisements and job vacancy measures, which are showing a tightening, rather than loosening, labour market.

Interestingly, the capacity utilisation measure also jumped to 82.4% in May, which is its highest level since mid-2008. This is consistent with our own view that business investment is starting to pick up and will show its first full-year of growth in six years in 2018. The RBA hinted at a similar view last week, in its post-board statement, when it noted that ‘business investment had picked up in those parts of the country not directly affected by the decline in mining investment’

It’s certainly a far more optimistic view than the one conveyed in Australia’s official GDP, business investment and labour market reports of late.

Operating conditions are strong, labour market conditions are strengthening and spare capacity is being eaten up — three scenarios that you would expect with stronger economic conditions.

While some may deem the NAB report as “soft” data, and merely continuing the recent trend of overstating the strength in actual economic activity, Bloxham says this report is giving a more accurate read on the economy, at least in Australia’s case.

“There are at least two reasons to think this is true,” he says.

“First, GDP has been knocked around by weather effects recently, including Cyclone Debbie. Second, we know that GDP is systematically underestimated in its early vintages and typically revised higher over time.”

And Bloxham says that it’s not only he who is thinking this, but also the RBA.

“In last week’s post-board statement the RBA was largely dismissive of the Q1 GDP, ahead of its release, noting on that year-on-year growth had slowed ‘reflecting the quarter-to-quarter variation in the growth figures’,” he says.

“They seem to be more focused on the business surveys.”

While some may point out that nominal GDP growth is likely to weaken in the coming quarters thanks to a decline in commodity prices, Bloxham thinks that won’t be enough to see the RBA cut rates as some in markets currently foresee.

Indeed, in his opinion, the RBA is likely to be hiking rates within the next 12 months.

“We expect the RBA to be on hold this year and lifting its cash rate in early 2018,” he says.

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