The latest gross domestic product figures showing the Australian economy grew the strongest it has for four years surprised most analysts and brought a smile to the prime minister and treasurer. The figures, however, reinforce just how dependent we are upon our exports – especially to China – rather than through any great strength within the domestic economy.
In the March quarter Australia’s GDP grew by 1.1% in seasonally adjusted terms and a slightly more muted 0.9% in trend terms:
The result was rather better than the expected result of 0.8% growth and it led to an annual growth of 3.1% (seasonally adjusted) and 3.2% (trend) – the best result since September 2012:
And we can pretty much thank exports – which defied the falling prices to record strong growth in volumes.
The balance of payments figures released on Tuesday showed that while annual exports of goods fell 10% in the past year in current dollar terms, the volume of those exports grew 5%. That’s good for real GDP growth (which concerns overall output growth) but is less good for the tax revenue.
Although nominal GDP growth remains weak, it remains largely on target to meet the budget estimate of 2.25% for 2015-16. But there is little sign of improvement – because, while the figures do show very solid GDP growth, most of it comes via exports, not the domestic economy.
In the March quarter, net exports contributed 1.1% points to GDP growth:
That is equal to the entire amount of GDP growth in the March quarter. Or, to put it another way, had net exports not contributed anything then GDP growth would have been 0%.
You might think, “Oh but when would that happen? We’re in an export boom phase!” Except it happened just three months ago. In the December quarter, net exports contributed 0% points of growth in seasonally adjusted terms:
One of the problems with relying on exports for growth is they can be pretty erratic – especially in a seasonally adjusted sense. That’s why I prefer to look at the annual contributions. And again here net exports have shown a big jump but rather more in keeping with what we have seen recently:
The figures highlight again just how changed our economy has become from where it was a mere four years ago. Back then – and for most of the past decade – the big driver of GDP growth was investment in the mining sector; now it is exports from the same sector.
And the importance of mining remains clear – the industry contributed by far the most toward growth in both the March quarter and in the past 12 months:
The services sectors – especially finance and insurance were also solid contributors. But the figures reinforce that the economic growth we are now seeing is not being accompanied by a growth of demand in the economy:
This is highlighted by the fact that while Western Australia and Queensland are clearly the states from which the large amount of or mining exports come, the final demand in those states continues to fall:
Now this does not mean they are in recession but it helps explain why those states – especially WA – have seen extremely weak employment growth and also weak housing prices.
The strong growth off the back of exports comes at a time when export prices are falling. The terms for trade fell 2.3% in the quarter and is now back at 2005 levels. Also falling were the overall prices index used for the GDP figures. The GDP deflator fell 0.6% in the March quarter and 1.0% over the past 12 months. This reinforces the low CPI figures and were a main reason for the interest rate cut last month.
Thus we’re in a pretty bizarre position where we have strong economic growth but not in areas which fuel strong demand or inflation. Labour costs for example fell again in the March quarter – suggesting that wage growth remains particularly weak:
The release of the figures saw the value of the dollar shoot up as investors took the overall growth as a sign the Reserve Bank would be unlikely to cut rates again. But there isn’t a lot in these figures that would change the RBA’s thinking. Interest rate cuts don’t really affect iron ore exports. But they do affect people investing in houses and dwelling investment remains strong:
All in all the figures are good news. If we have an economy reliant upon exports, then it is good that those exports actually do grow strongly.
But in times past such solid growth would usually be associated with solid growth of wages and national income. GDP growth is often criticised for not really measuring things that filter through to people. That’s often overstated but, when the growth is mainly coming from an industry which has seen employment in the past two years fall by 14%, where wages are stagnating across the economy, people are perhaps within their rights to wonder just when will they get to see any of this growth.
