Joe Hockey knows a thing or two about looking foolish. The Treasurer has a habit of doing it himself from time to time.
This is, after all, the Treasurer who had to apologise for saying the poor don’t drive cars as much as the rich, was pictured smoking a big fat cigar outside Parliament just before delivering the toughest budget handed down in living memory. I could go on: superannuation for houses, taxes on tampons, the 2014 Budget.
Hockey couldn’t help himself this week when talking about the GDP data that showed the economy grew 0.9% in the first quarter of this year, giving an annualised growth rate of rate of growth at 2.3%. Analysts had been expecting a quarterly increase of 0.7% with annual growth of 2.0%.
That’s a great beat in anybody’s terms. Hockey said: “We’ve had a terrific set of numbers that came out today and those numbers have proven that there are some clowns out there that are talking about recession and dark clouds on the horizon.”
These people, he said, are “made to look like complete fools”.
So who are they? While there are people on every street corner saying we’ll all be rooned and that Australia is heading for a recession, there have been some worrying data releases on Australia’s future economic outlook, most notably the release of the business investment intentions, or capex, released last week.
Surely the Treasurer couldn’t be referring to the economics team at giant investment bank UBS, who soon after the capex data came out released a note titled: “Capex outlook worsens from bleak to recessionary”.
There are also some uncomfortable facts for the Treasurer about the GDP figures he’s so excited about. GDP data is backward-looking: it tells you what happened before, but almost nothing about what’s happening in the future, or, “on the horizon” as the Treasurer might say. I’ve heard GDP described as “the laggiest lag thing from lag-town”.
Economists and traders don’t pay too much attention to it because it doesn’t tell you much about how things are now or will be in the future.
Then there are some little thorns in the GDP data anyway. The Q1 figures basically count up all the transactions in the economy between January and March, adjusting for exports and imports, to arrive at a total number. Comparing that to the previous quarter gives you a growth rate.
Of the 0.9% growth we saw in Q1, 0.3% of that was from the “increase in inventories”, which are basically businesses building up stuff in warehouses. When looking at the GDP data when a large chunk of it comes from this area, there is simply no way of knowing whether it is good news (because businesses are hopeful they are about to sell more stuff) or very bad (because businesses can’t sell stuff they have already bought). It is a notoriously impenetrable component and a big fat question mark over the data the Treasurer is crowing about.
Finally, the capex data that economists were universally sombre about is forward-looking, in that it looks at the intentions of companies to invest, which usually tends to create new jobs and stimulate growth. Investment by businesses in the non-mining sector is vital to support the economy as it transitions away from the resources investment boom. And right now, if the ABS data is right, the outlook here is very grim indeed.
Sean Callow, an economist whose analysis is rated highly by folks around town and who works under the mighty Bill Evans at Westpac, has a note out this morning explaining that the “clowns” Hockey is referring to actually have some solid ground.
Westpac, like most sensible observers, isn’t forecasting a recession, but does predict lower growth of 2% for this year. Callow wrote:
But to give the “clowns” their due, the recent data flurry has offered plenty of reason for concern, from the capex survey to the record trade deficit in April and a disappointing flat reading on Apr retail sales. GDP itself also offered cause for concern beyond the encouraging headline. As the chart across shows, the ongoing fall in Australia’s terms of trade is steadily squeezing national income. Households are attempting to maintain consumption by saving less: the saving ratio continued its decline to 8.3%, a low since the GFC.
There is plenty more in the report to worry both “clowns” and the rest of us who are a bit more upbeat. Westpac Economics argues that the GDP report “strengthened the case for an eventual rate cut”.
Or look at it from the perspective of another bank, ANZ, whose economic team perfectly predicted the GDP data outcome, so were a little more bullish in their forecast than the rest of the market.
Chief economist Warren Hogan described the capex data as “alarming” – not a word to use lightly – although he added “if they can be trusted”.
One other way to look at it is in this chart. Hockey pointed out that 0.9% growth in the March quarter made Australia “one of the fastest-growing economies in the developed world, and faster than any of the G7 in the quarter”. This is correct. But it’s also inarguably the case that, looking at the annual GDP growth rate over the past year, the rate of growth has been slowing down.
The Australian economy is in an unusual place at the moment. It used to be the case that rate cuts were a welcome thing. Now there’s a mounting sense that, while they might reduce the mortgage payments, rate cuts are signals that the RBA is increasingly concerned about the outlook, and with the cash rate at 2%, the shots are running out of the locker.
There’s a difference between forecasting a recession – the economy going backwards – and arguing that growth is going to be subdued or slower than we’re used to.
And if we’re going to confront the reality of what would be required to get the economy back to growth rates of around 3% (which is about what’s needed to create enough jobs to stop unemployment rising), then that involves dealing with some cold facts about the forces dragging on the economy and those which, if allowed to build, could put a harder brake on growth.
Hockey has over-reached here. Dealing with the facts isn’t foolish.