Australian Markets Weekly

The Government Statistician released the Q2 National Accounts last week which showed the economy doing quite well. Or at least a bit better than we feared given mining investment is slumping and commodity prices are falling.

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Only Statisticians live in the “real” economy

The Government Statistician released the Q2 National Accounts last week which showed the economy doing quite well. Or at least a bit better than we feared given mining investment is slumping and commodity prices are falling.

Real GDP grew +0.5% in the June quarter and a healthy 3.1% for the year, not far from the RBA’s forecast of 3%. The detail contained what most expected to see – mining investment is falling, dwelling investment is improving strongly, household and Government spending fairly subdued. We’ve also been looking for a big contribution to GDP growth from “net exports” as mining projects are completed, with imports of capital equipment to fall and volumes of mining exports to surge. During Q2 net exports was actually negative, a swing owing entirely to the increase in Q1 exports being so huge meaning some pay-back was always likely in Q2. Over the year to June 2014, “net exports” still contributed a solid 1.0% of the overall 3.1% increase in real GDP.

Employment & income following slower nominal economy

While the real economy grew 3.1% over the past year, only a touch under the past two decades average of 3.3%, most “feel” the economy is not that great. I’d agree that the vibe doesn’t feel around long term averages and I expect the answer for this lies in the difference between real and nominal GDP, as well as what’s happening to household income – not a lot it turns out.

The closely followed “real” GDP is basically a measure of volumes once we’ve stripped out what’s happening to prices. But what’s happening to prices as well as volumes matters for businesses when they measure their profitability, pay tax, and think about investment in new equipment or hiring decisions.

During Q2 the nominal GDP did nada. Volumes grew 0.5% but prices fell 0.5%. A key price group that fell was commodities, with Australia’s overall terms of trade down 4.1% in Q2 and down 7.9% in the year to June.

Putting numbers on it, in the year to June 2014 real GDP grew 3.1%, nominal GDP 3.3% (near half the two decade average of 6.3%), and employment grew 0.9% (also half the two decade average of 2%). By contrast, in the year to June 2008, real GDP grew 2.9%, nominal GDP grew a staggering 9.1%, and employment grew 3.0% – stronger than real GDP.

The key difference was that in 2008 commodity prices were rising – the terms of trade rose 12.1% in the year to June. Then employment growth was strong and now it’s subdued. Then household income was growing strongly and now it’s not – real net national income per person fell 0.5% over the last year yet in the year to June 2008 it rose 4.1%. Then productivity growth (real GDP per person employed) was weak/negative and now it is growing strongly.

The net of all this is that yes, the real economy has grown a healthy 3.1% over the past year. This is close to the two average and we expect it will continue to grow around this pace in the year(s) ahead. But with prices for our exports falling, company profits and household incomes are not growing anywhere near as strongly as they once did. Neither is employment. So yes, if it doesn’t feel great you’re probably right.

Week ahead

Key releases this week to be the NAB Business Survey tomorrow, consumer confidence Wednesday, and the labour force survey on Thursday. While I’ve just written that employment and income growth are likely to be subdued this week’s consumer confidence and employment data will probably be quite good. For consumer confidence, distance from the May Budget and rising asset prices are putting consumers in a better mood even with modest income growth. On employment, labour demand indicators bottomed many months ago now and have been pointing to a below trend 10-15k pace of monthly job gains ahead. Despite this, the Statistician has only counted 10k new jobs over the three months to July. Some statistical catch-up is due and we expect 25k new jobs for August and the unemployment rate to tick down from 6.4% to 6.3%.

Offshore we have the RBNZ Thursday (pause and less hawkish) while the US FOMC is next week.

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