Saturday, June 5, 2010

Await boom but keep spending

Just about everything happening in the economic world at present is premised on the early return of the resources boom. If so, it won't come a moment too soon for the growth fiends: this week's national accounts show the economy losing momentum in the March quarter.

The imminent resumption of the boom explains why the Reserve Bank has been so keen to get interest rates back to normal levels, why the government is expecting to have the budget back in surplus in three years and, indeed, why it thinks now's a good time to reform the mining industry's royalty payments.

But the boom ain't back yet. To the contrary, the accounts show the economy growing by 1.1 per cent in the December quarter, then slowing to 0.5 per cent in the latest quarter. Those figures probably exaggerate the extent of the slowing - it's a mistake to take quarter-to-quarter changes in the accounts too literally.

Even so, what stands out is the economy's continuing dependence on the rapidly withdrawing fiscal stimulus. So if you think the stimulus was unnecessary or all a terrible waste or that the government should be winding it back much faster than it is, think again.

By far the greatest single source of growth during the quarter was government spending, which contributed 0.9 percentage points to the increase in gross domestic product. Within this, real capital works spending by the federal government grew by 15 per cent and that by the states by almost 17 per cent.

Much of that would be stimulus-related spending on public infrastructure but a fair bit would be the school-building program. Sections of the press have worked overtime to give an exaggerated impression of this program's wastefulness.

I don't doubt there has been some waste and that's regrettable. But the fearless campaigners never acknowledge (and probably don't understand) the macro-economic imperative to get the money spent as quickly as possible so as to limit the rise in unemployment and stop the economy dropping into a downward spiral.

It's all very well banging on about the waste of taxpayers' money but unemployment is also a waste. It's a waste of the time idle workers could have contributed to the nation's production.

Though the principal loss is borne by the jobless workers (who gives a stuff about them?), there's a cost to all of us - plus, of course, a cost to the budget in unemployment benefits and tax revenue forgone.

When workers are jobless for long periods they suffer a lasting loss of skills, confidence and motivation, which is also a loss to the community. And when high unemployment scares consumers into cutting their spending and causing yet more unemployment, otherwise-sound businesses go bankrupt and are broken up, destroying capital at a direct cost to the businesses' owners and an indirect cost to all of us.

So the next time you read another allegation of wastefulness (with no mention of the great majority of successful projects), think of all the costs and waste that would have occurred had the money not been spent. (It remains an inconvenient truth that even wasteful spending stimulates activity and helps avoid unemployment.)

Back to the national accounts. The only other significant positive contribution to growth in the quarter came from the lacklustre rise of 0.6 per cent in consumer spending. The $900 cheques are a distant memory.

But against these positive contributions are two main negatives. Business investment spending subtracted 0.5 percentage points from real GDP, with non-dwelling construction down 2.5 per cent and spending on machinery and equipment down 6 per cent (after being up 10 per cent the previous quarter).

Ah. More evidence of the fiscal stimulus - or rather, the absence of it. Business spending on plant was way up in the December quarter because that was the last quarter of the special tax break. It was way down in the March quarter because many businesses had brought their spending forward to take advantage of the special offer.

The other negative contribution was external. The volume of exports fell by 0.5 per cent (mainly due to a fall in coal exports caused by cyclones in Queensland) while the volume of imports increased by 2 per cent. Together, these subtracted 0.5 percentage points from GDP.

It's clear the fiscal stimulus is having conflicting effects on the economy. The programs that have wound up are subtracting from growth while those still going are adding to it. According to Treasury, the net effect is a subtraction from growth in the quarter of 0.1 percentage points.

Just think how much weaker the quarter's growth would have been had the government yielded to the opposition's calls for the stimulus spending to be cut off earlier than planned.

It would be wrong to conclude, however, that the accounts showed no sign of a returning resources boom. The terms of trade - the ratio of export prices to import prices - improved by 4 per cent, their third successive quarterly advance.

Clearly, the prices we're getting for our mineral exports are rising and this was also evident in the $2.2 billion turnaround in the trade balance for the month of April.

Whereas real GDP grew by only 0.5 per cent in the March quarter, the improvement in the terms of trade meant real gross domestic income grew by 1.3 per cent. Over the past three quarters, real GDI grew by 3.5 per cent, as against growth in real GDP of 1.9 per cent. This is an early indicator of stronger consumer spending on the way.

And although business investment spending was weak in the March quarter, we know from surveys there's huge spending in the pipeline, particularly mining and natural gas projects.

Last quarter the economy was betwixt and between but, never fear, the boom is returning (the big miners' callous brinkmanship over taxation notwithstanding).