The latest GDP figures don’t need much spin – they are very good; much better than could have been hoped a year ago. There remains a lot of work still to go to undo all the damage of the pandemic, but the economy is in a very good position to do so thanks to government spending.
It’s a bit tough at the moment to say how well the economy is going. After all, you need to recognise that the Reserve Bank has kept the cash rate at 0.1%, and it still thinks it needs to keep telling the private sector that it will keep it there until 2024.
That means not only are interest rates at record lows but the Reserve Bank is so worried about the state of affairs it is telling everyone that it will keep interest rates at record lows for at least another three years (so please keep investing).
That is not usual.
But aside from that, yes, the economy is travelling well … if you also ignore that governments both state and federal are spending more than ever before to keep the economy moving:
Were it not for government spending and investment over the past 12 months, the economy would be still smaller than it was a year ago and about 1% smaller than it was at the end of 2019.
We can certainly see the impact of the government stimulus in the increase of household living standards:
The increase in social assistance benefits helped increase real household disposable income per capita over the past year by a very solid 3.7%.
So yes, the economic car is travelling along very nicely … if you ignore the Reserve Bank governor and treasurer-secretary behind pushing like hell.
But those two big caveats aside, the March quarter GDP figures were quite good.
As was expected, economic activity in the first three months of this year was bigger than the last three months of 2019.
The quarterly growth of 1.8% meant that in March the economy was not only 1.1% above where it was a year ago, but 0.8% above where it was at the end of 2019 before the pandemic hit:
When only considering the amount the economy produces every three months things are looking pretty good.
We are now down just 2.1% on where we would have expected to be before the pandemic hit – still a massive amount (nearly $11bn) but a heck of a lot better than the 8% gap there was in the middle of last year:
But that only includes looking at the most recent quarter when things were doing quite well. As with all things in life however, things are less wonderful when you also count the amount lost.
The total amount of economic production over the past 12 months was just under 5% less than would have been expected.
Essentially, over the past 12 months Australia’s economy was about $100bn smaller than it was expected to be:
That will take much longer to recover.
So what is powering this growth?
As noted, over the past year government spending was the big driver, but more recently the first three months of this year saw a solid increase in household consumption, investment in machinery and equipment and the construction of dwellings:
The other big driver has been the change in inventories.
That rather dull sounding phrase just means that firms have been increasing their stock of unsold items.
Is that good?
Well, yes … but maybe no.
It is good if they are building up stock because they expect to sell them; it is not if they are building up stock because they are unable to sell them.
As it is, household consumption in the first three months of this year was essentially the same as it was 12 months earlier. But there were big differences.
Australians spent $1.1bn more buying new vehicles, $1.2bn more on furnishings and household equipment and $1.3bn more on clothes and footwear, but $5.1bn less on transport services:
The pick up in businesses investing in machinery and equipment as well as people building homes was very much welcome, and clearly driven by the government’s policies such as the instant asset write-off and the homebuilder scheme.
As I noted earlier this week, such investment is needed to continue to fuel employment growth, and especially at a time when trade is such that net exports are actually detracting from economic growth. In the first three months of this year we exported $71bn less than we did a year ago but we imported $9bn more:
So all in all, the GDP numbers are good.
But they are getting a lot of help from the government and the Reserve Bank – and that is good, because the private sector and household continue to need it.