Can we ever really know how the Australian economy is doing?


Our growth numbers are at least encouraging - despite the negative commentary, writes Craig James

Each quarter investors are presented with a barrage of new economic information. In the space of a fortnight in early March, June, September and December you can get the lowdown on how fast the economy is growing, what we are spending our cold, hard cash on, the state of the job market and almost anything you wanted to know about the housing market.

Now in theory this should mean that we truly know what state the economy is in. And armed with this plethora of statistics, we should have a good handle on the business environment for companies and a sense of where interest rates are headed, together with the sharemarket and property market.


But how true is this? Do we just end up coming away even more confused than where we started? Sometimes I think it is more the latter, rather than the former.

Take the March quarter economic growth figures. The data showed the economy growing by 0.9% in the first three months of 2015 - at face value a good result. In the US, they take this quarterly result and multiply it by four to get an annualised rate.

And if you do that, 3.6% annualised growth would be close to the fastest growth rate of the world's biggest economies. And it's worth noting that Australia is the 12th-largest economy in the world.

The Reserve Bank prefers to look at the past six months of growth and then annualise it. And if you do that, the growth estimate is around 2.8%. So is this "good" growth?

On average, growth over the past decade has been 2.8% while the 15-year average is 3%. So the result can be best described as encouraging.

The good news is that a number of sectors contributed to growth in the March quarter: housing, exports, inventories, household consumption and government consumption. The main drag was business spending - largely because of mining, now that the "one-in-a-100-years" investment boom is over.

But data is of little use in itself - it needs to be placed in context. That's why we look at longer-term averages to get a sense of what's normal. And the best description is that Australia could be doing better.

And that brings us to what we are doing about it. The Reserve Bank cut interest rates in February and May. The federal government also cut the tax rate for small business in the May budget and allowed tax write-offs for small business asset purchases up to $20,000. The Australian dollar has come down. And the global economy has brightened.

Most economic data can only tell you where we have been, not where we are going. So from that perspective the economic growth figures are encouraging as they pre-date the interest rate and budget stimulus.

Provided that Aussie consumers and businesses embrace the stimulus on offer, you would expect that the economy will continue to gather pace over the coming year. And, certainly, if spending lifts so will business incomes and profits and this should eventually be reflected in company valuations and share prices.

Interestingly, this relative upbeat assessment of our economic circumstances and fortunes stands in contrast to some of the commentaries made at the time the economic data was released.

Unfortunately, the economic commentary available in the mainstream media and in financial markets generally is highly variable. And commentary tends to be skewed to the negative. The simple fact is that bad news sells.

To truly understand what is going on in the economy requires investors to read and listen widely to the various commentaries and to adopt a critical posture.

A case in point was the GFC, when a barrage of negative commentaries prompted some investors to sell assets. It is clear today that those who were more discerning in their analysis were buying rather than selling and the results speak for themselves.


Post a comment
Link to something HSbpR9CT