There are two ways to view Australia’s surprising quarterly rise in GDP – revealed, as Lex notes, “to a largely incredulous world” on Wednesday:
The glass-half-empty reading is that Australia, far from being different from the rest of the globe, is merely lagging behind it. As the year goes on, the effects of Australia’s insulating factors — the commodities boom and aggressive, upfront policy action — will start to fade.
But there is another possible scenario — one in which policy gains traction and, helped by Asian demand, Australia escapes with just one quarter of falling output. That would mirror America’s experience in 2001-02 when aggressive monetary and fiscal stimulus averted a downturn. But, in the pungent phrase of Morgan Stanley strategist Gerard Minack, that turned out to be “Homer Simpson policymaking”. Faced with a crisis caused by leverage and inflated asset prices, the Fed’s actions led to more debt, more overvalued assets and a bigger eventual crash
Indeed, gazing at Australia’s robust quarterly growth performance, the pundits and commentators have divided into the half-full and half-empty brigades. BusinessSpectator’s Alan Kohler also likes Minack’s “Homer Simpson policymaking” line – and likes Minack in general, pointing out that Wednesday’s testimony by Fed chairman Ben Bernanke to US Congress should “wipe the smiles” off Australian faces.
Wednesday’s GDP figure for the March quarter was terrific news, no doubt, and will put a spring in the national step, but when you look closely, the numbers were good in only one respect, and even that was two-sided: private consumption rose, offsetting a business slump, but it was debt-funded.
As Gerard Minack of Morgan Stanley has pointed out, we are doing a Homer Simpson: “Beer (read: debt) is the cause of, and solution to, all of life’s problems.”
Minack, notes Kohler, also came up with a surprising analysis of the national accounts, saying the GDP increase was entirely due to a change in the way the Australian Bureau of Statistics tracks commodity prices, after the bureau decided to factor in lower prices for major commodities contracts earlier than usual.
“Factoring in a lower price implied a higher volume for exports, which lifted GDP”, in Minack’s words. In effect, the lift in GDP was “statistical jiggery-pokery”, adds Kohler.
Meanwhile, another economist, Stephen Koukoulas of TD Securities pointed out that GDP per capita has fallen for four straight quarters and is down 1.6 per cent for the year. So the only thing keeping GDP positive is population growth.
“But aren’t these guys just grizzly bears, trying to rationalise the fact that they were wrong about Australia falling into recession?”, asks Kohler. Maybe, he says, “except the retrenchment in business investment (down 1.1 per cent in the March quarter) is consistent with more job losses in future and, more importantly, falling incomes”.
Then there is the rising debt load which, as Kohler notes, “has a habit of catching up with you”. As Bernanke told Congress:
“…near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.”
But whereas in the US all the borrowing is now being done by the government, in Australia, the burden is being equally shared, explains Kohler, adding that the US savings ratio has gone from zero to 5.7 per cent, while in Australia it continued to fall, and is now down from 6 to 1.8 per cent:
Bernanke warned … that the US must begin to address “fiscal imbalances” (too much debt) immediately. If he were speaking to Australia, he would be wagging a finger at both the government and consumers.
So has Australia avoided recession? Ask again in a year or two, when the new global mood of thrift and caution finally arrives Down Under.
Meanwhile, The Australian’s Clive Mathieson marvelling at the GDP numbers says that Australia “can’t even muster a decent recession” – or at least, doesn’t seem to be able to:
Perhaps we won’t have (a technical) recession after all, but with all but two developed nations in recession, it will still be an absolute miracle if Australia, even with its banking system remarkably intact, skates through the crisis with GDP above the line.
In recent months, most economists had foreseen an official recession (even if a few wobbled on Tuesday after a stunning set of trade numbers). Even Wayne Swan [the Treasurer] has been able to bring himself to utter the R-word.
Until Tuesday’s trade numbers, everyone thought the March quarter was rough, particularly with business investment down sharply. Now, notes Mathieson, “they’re all banking, with a fair degree of prayer, on a swift recovery”.
But as Australia bounces along the bottom, it’s hard to pick a clear trend in the wave of economic figures, he warns.
Debt, as Lex notes, could be Australia’s biggest problem. The country has “yet to fall out of love with credit”:
The Reserve Bank has cut 425 basis points from the cash rate since September, bringing it to a 49-year low; the government has handed out A$12bn of money it doesn’t have. House prices have swayed but housing credit demand has not; over the year to April, it rose by more than 7 per cent. While US consumers are urgently repairing balance sheets — the personal savings rate hit 5.7 per cent in April, from zero a year ago — Australia’s are not. Consumer spending grew 0.6 per cent from the fourth quarter; savings fell. Yet household debt, almost equal to GDP, is at levels comparable to the most credit-drenched economies of the world.
Glass-half-full types should recall Mr Simpson’s circular logic: “Beer is the cause of, and solution to, all of life’s problems.” Solving a debt problem with more debt is simply storing up trouble.
Indeed. And meanwhile, around the world, the hunt is on for so-called “green shoots of recovery”, says Mathieson, “economic markers poking through the black like the Australian undergrowth after a bushfire.”
The strong Aussie dollar, which this week broke through US82c, shows traders are confident we’re in for a quick recovery, dragged out of the mire by China and the effects of its own $700 billion stimulus package on the commodities we export.
There are certainly plenty of positive stats around and the bulls embrace them as evidence the worst is over.
“Yet,” argued The Times’s Anatole Kaletsky this week, “most economic commentators have remained sceptical or even contemptuous of all this evidence. Surely, they argue, the threat of another Great Depression could not just have vanished in a puff of statistics? Is anyone so naive as to think that a crisis caused by over-leveraging can be solved by government borrowing and money-printing?”
Naive? Maybe, says Mathieson. But wouldn’t it be nice?