Friday, November 26, 2010

GDP could go backwards?

Statistically. Incredibly.

Noone is talking recession. But financial market economists are now seriously considering the next worst thing - an end to Australia's extraordinarily run of economic growth next Wednesday with a negative outcome for GDP.

The September quarter figure will be weighed down by a surprise hit to exports, extremely weak residential construction, a dent in public construction as government stimulus programs wind down, and new figures released yesterday showing a slide in private investment in equipment and machinery.

"The picture isn't pretty," ANZ economist Katie Dean told the Herald. "Our new estimates suggest GDP growth was broadly flat in the September quarter. If we don't see some good gains in profits and inventories in the data due Monday, we will become concerned about the possibility of a negative GDP on Wednesday."

Just weeks ago economists were predicting economic growth of around 0.9 per cent for the quarter, not too far below the 1.2 per cent recorded in the June quarter, but a bunching of bad data has seen most wind it back.

Westpac yesterday halved its forecast from 0.6 to 0.3 per cent... "Housing activity fell, business investment was probably flat, public investment most likely fell and net exports will probably detract from growth," said Westpac economist Andrew Hanlan. "That just leaves consumer spending, public spending and changes to inventories to drive growth. And a lift in farm production."

Constructing the GDP is a bit like a jigsaw puzzle, and the final picture is negative more often than is remembered. GDP slipped for one quarter in December 2000 and June 1986 - both times in which Australia was far from recession.

At fault this time will be a regularly-scheduled shutdown of Chinese steel mills which wiped three quarters off Australian exports of coking coal to China in one month and the withrawal of the stimulus which the Treasury itself expects to wipe 1 percentage point from GDP over the year.

Construction figures released Wednesday were exceptionally weak with residential work down 6.1 per cent. Yesterday's figures showed a 6.2 per cent increase in capital spending by business, but the figure for equipment, plant and machinery which feed directly for GDP fell 1.1 per cent. The future looks good with expectations pointing to a 23 per cent surge in investment this financial year led by a 60 per cent surge in mining investment. But the expectations won't make it into the GDP.

"Wednesday's figure will historical, hit by one-offs unlikely to be repeated" said Ms Dean.

"It won't mean the Reserve Bank was wrong to raise rates. It looks forward, and the outlook is strong."

Published in today's SMH and Age

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