Craig James at Commonwealth Securities:
"The Bureau of Statistics reported that the Australian economy contracted by 0.5 per cent in the December quarter. But one of the largest contributors to the result was the error term - or statistical discrepancy.
Excluding the discrepancy the economy was flat in the December quarter.
If there was a downturn in the December quarter, Australian consumers and businesses can't be entirely blamed. Private spending rose by 0.2 per cent in the December quarter after a similar rise in the September quarter. Public spending fell.
The national accounts data will be constantly revised over time. The best way to characterise Australian economic growth at present is "flat" - it is neither rising or falling markedly. And while Australia is a casualty of war, it has actively responded to limit the damage through fiscal and monetary policy...
To gauge overall economic performance, you can either add up all spending in the economy, or all production or all income. By rights you should get the same outcome. But given the lack of complete information, there are usually "errors".
By convention the Bureau of Statistics focuses on the spending measures. But this time around the error term or statistical discrepancy is extremely large.
That is, negative $1382 million - the largest negative result, or drag on GDP growth, in 15 years. The statistical discrepancy was one of the biggest negative influences on GDP growth in the December quarter, subtracting 0.5 percentage points from bottom-line growth.
As always, the national accounts data will be updated over time and the error term will reduce. In fact the statistical discrepancy in the September quarter was just negative $40 million. In the past, large negative discrepancies are usually followed by a positive result in the following quarter, providing a positive continuation to GDP growth.
The key point is that the economy may or may not have gone backwards in the December quarter. More accurately it was probably flat. We shouldn't get hung up on the quarterly GDP numbers as they largely serve as part of an historical record. Rather we should focus on the current drivers of economic growth and the appropriate policy responses.
The other interesting point is that consumers and businesses were actually spending in the December quarter. That is, private spending grew by 0.2 per cent. But government spending surprisingly went backwards by 0.3 per cent at a time when all arms of government should have been actively supporting economic growth.
Another mirage in the GDP data was the supposedly sharp increase in household income. The $7.9 billion increase in household income was wholly due to the government handout. It was a one-off boost that won't have a recurring impact. Without the lift in social assistance benefits, household income fell slightly in the quarter. Still, the good news is that the one-off payment did work to improve household balance sheets and that may serve to lift spending in future months.
The other good news is the super-low level of inventories. Production will respond directly to any lift in demand, although imports will also."