- GDP negative 1.2% worst since 1991
- consumers still saving but wages pressure growing
- business investment is back
- not a lot to sway the RBA


By Greg Peel

I've come to appreciate that following economist forecasts of an upcoming quarterly GDP result is just like watching an auction on eBay. Opening levels are first established but then nothing much happens for a while. Occasionally an incremental change punctuates the silence along the way but for the most part the bidding is steady. With minutes to go the lead bidder is already assuming he's got it in the bag when...bang ? all hell breaks loose.

The problem with forecasting the quarterly GDP result using the available monthly data from the quarter is that the raft of quarterly readings which influence the GDP (wages, corporate profits, capex, net exports etc) often tells a different picture. And those measurements are released in the final days leading up to the actual GDP result.

As late as Monday economist consensus had Australia's March quarter GDP contracting by 0.3%, albeit the spread was quite wide. Westpac, for example, was expecting 1.0% contraction. By yesterday the shock quarterly net export number had economists scrambling to revise (not Westpac), leading to a new consensus of 1.1% contraction. Again the spread was wide, with at least one economist on 1.7% contraction.

Today's result showed 1.2% contraction, quarter on quarter, which implies year-on-year growth of 1.0%. The December quarter result was 0.7% growth for 2.7% annual, albeit today that was revised up to 0.8% growth. The March quarter 2011 was Australia's worst economic performance not since the GFC, which did cause one quarter of contraction, but since the March quarter of 1991, at the depth of Paul Keating's recession we had to have.

Sounds ominous, but as we all know it's all to do with the weather in the quarter impacting on that which is currently driving the Australian economy. Exports of iron ore were hit hard by cyclones in WA and exports of coal were hit hard by floods in Queensland. And it was not just lost production but damaged rail and port infrastructure which impacted, albeit there was some commodity price offset due to shortages. It nevertheless doesn't matter a hoot what the price is if you can't get the stuff to market, and hence the GDP contraction.

The good news is that things are now back on track, Hughie permitting, and thus the June quarter should provide a big GDP boost. That's the way the RBA sees it anyway. For the past few months the RBA has insisted the weather impact on mining and agriculture would prove but a temporary bump and not enough to sway policy. So the question is: is this weaker than expected GDP result also weaker than the RBA expected, thus reducing the chance of any immediate interest rate rise?

Well yes and no. Economists have been split largely between the June rate rise camp and the August rate rise camp ever since the minutes of the May RBA meeting were released. The language in those minutes was very hawkish and implied inflation had begun to move up faster than the RBA had anticipated. Westpac, for example, took it to mean a June rate rise while ANZ, for example, stuck to August in the belief the RBA would hold off until the June GDP result was in. Given March was weather impacted and June would likely be bounce-back impacted, an average of the two would provide a clearer picture.

After today's result, ANZ is sticking to August for the reasons already given and for the fact the result was weaker than expected. Westpac has now pulled back to July, but not because it believes the RBA will change its view now the GDP is in. Westpac simply believes a June rate hike at this time (next Tuesday) would be bad PR on the part of the central bank. Indeed, both banks' economists agree the result was not actually as weak as it nominally appeared, and actually rather inflationary.

Exports shipments fell 8.7% in Q1, and that number alone tells the tale. It represents 2.4 percentage points off the GDP compared to expectations of 1.5ppts.

Domestic demand, however, was quite strong at 1.3% growth (compared to 0.7% expectation). Housing jumped 4.6% (2.7%) and plant and equipment jumped 6.3% (2.4%). That last one is always a giggle, given the 2.4% forecast came from last week's Q1 capex report. Every single quarter the P&E number in the capex report and the P&E number in the GDP are wildly different despite the fact they should be the same and that they're released only within days of each other.

Household consumption would have had Gerry on the edge of his Chippendale, and it rose 0.6% (0.5%). So that's good news for retailers, except that the household savings rate jumped a massive 11.5%. That's up from the 9.7% growth in Q4, and (if we ignore the big jump in the GFC) the biggest jump in about 25 years. Gerry would have choked on his Armagnac. But if consumption is up while savings are up strongly, what gives? Oh no...

?Average non-farm compensation of employees? is the broadest measure of labour cost in the economy and it rose 2.4% in Q1 to be 5.7% higher over the year. To date even the RBA has been surprised that previously strong trade balances had not flowed into stronger wages, but it appears the trickle has begun. That number was quite inflationary in its implication.

What's more, every stock analyst in town has been expecting a pick-up in business investment for the past two years which just hasn't happened, even though the RBA has been preparing itself for the inevitable. Well, Q1 new business investment was up 2.8% (1.6%). Again, the inflation implications are unsettling.

So the consumer might still be very much MIA, and we may have had a bad quarter export-wise, but there is little in this GDP report to really alter the RBA course, economists suggest. Whether the next rate rise comes next week, next month, or in August, there is little doubt it is coming.

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