Saturday, September 4, 2010

Our resources boom comes bouncing back

This time three months ago it was clear the economy was being propped up by rapidly withdrawing budgetary stimulus, and it was not clear private spending would perk up in time to take over the running.

This time two weeks ago it seemed clear business investment spending was doing OK but households were dragging the chain, with retail sales and home building approvals surprisingly weak.

What a difference three months - or even two weeks - makes. This week's national accounts for the June quarter show the economy roaring along, with the private sector firing on (almost) all cylinders even as the budgetary stimulus continues to withdraw. The boom is coming back.

One lesson: don't get too carried away by talk of a two-speed economy.

The accounts issued by the Bureau of Statistics showed real gross domestic product growing by 1.2 per cent during the quarter and 3.3 per cent over the year to June. If we were quoting the figures the way the Americans do, we'd say the economy grew at an annualised (that is, made annual) rate of almost 5 per cent during the quarter (multiply 1.2 by 4 and add a bit for compound interest).

Now that's a boom. But since the quarterly rate of growth varies a lot, it probably exaggerates the pace of the upturn, so it's better to do it the Aussie way and focus on the actual annual growth of 3.3 per cent - right on our medium-term trend rate of growth.

Public sector spending accounted for just 0.3 percentage points of the 1.2 per cent growth for the quarter. Consumer spending grew by 1.6 per cent and (because it makes up well over half of GDP) accounted for most of the rest.

Home building activity grew by 5 per cent, showing households have really started pulling their weight.

How can consumer spending be so strong when retail sales have been quite weak? Because there's a lot more to consumer spending than retail sales.

We get figures for retail sales monthly while we wait for the quarterly national accounts, so we watch them closely, but they take no account of many of the services households buy, nor the cars they buy. In this quarter, spending on cars was up 11 per cent. How could home building be growing strongly when local government home building approvals have been weak for quite a few months?

Because of lags in the system. There's a delay between new homes getting the council go-ahead and actual building starting. The recent downturn in approvals says actual building activity isn't likely to keep growing strongly.

The accounts show a sharp fall in the level of business inventories subtracted 0.7 percentage points from GDP growth for the quarter. But the volume of exports grew by 5.6 per cent, whereas the volume of imports grew by only 3 per cent, meaning "net exports" (exports minus imports) contributed 0.4 percentage points to overall growth.

Actually, the fall in inventories and the jump in exports are related. Bad weather caused a lot of Queensland coal to be stockpiled rather than shipped overseas in the March quarter, but there was a catch-up in the June quarter.

So that's where the growth came from in the quarter: consumer spending, home building and exports, with just a little help from government spending.

Notice something missing? Business investment spending recorded negligible growth during the quarter. But not to worry. We know from the capital expenditure survey that, relative to this time last year, businesses are expecting to increase their investment spending by 24 per cent in the present financial year.

Within that, mining investment is expected to be up 48 per cent. Now, the actual increase isn't likely to be so huge. But it will be big - so there ain't much doubt: the resources boom is back.

And the other sign of the return of the resources boom is the marked improvement in our terms of trade - the prices we receive for our exports relative to the prices we pay for our imports. The ratio improved by 12.5 per cent during the quarter and by 24.5 per cent over the year.

An improvement in our terms of trade means the same quantity of exports now buys a greater quantity of imports.

Guess what? That's one definition of getting richer. Whereas real GDP grew by 1.2 per cent during the quarter, real gross domestic income grew by 4 per cent. And now you know why.

As the nation's higher income circulates around the economy a lot of it gets spent and, as it's spent, jobs are created. So where's the impetus for greater consumer spending coming from now that the budgetary stimulus has largely been withdrawn? That's where.

In nominal terms, households' earnings from wages grew by 2.9 per cent during the quarter, with average earnings rising by 2.5 per cent and the number of employees up by 0.4 per cent. So this is what allowed consumer spending to grow by 1.6 per cent, even though it involved the rate of household saving falling from 3.4 per cent to 1.5 per cent of net household disposable income. Talk of resources booms makes people think of two-speed economies. The quarterly national accounts don't divide GDP by state, but they do divide up a poor substitute for it, "domestic final demand" (which is GDP before you allow for changes in inventory levels and for exports and imports).

Consider this. Nationally, domestic final demand grew by 5.3 per cent over the year to June. Three states had growth fairly close to the national average: NSW on 5.7 per cent, South Australia on 5.9 per cent and Victoria on 6 per cent.

Way above the national average was Western Australia on 7.9 per cent. Dragging down the average were Tasmania on a weak 2.6 per cent and Queensland taking out the wooden spoon with a pathetic 1.6 per cent.

Huh? Queensland in the slow lane? Yep. Its consumer spending and business investment spending are particularly weak. It's suffering a hangover in the residential and commercial property markets after a boom preceding the financial crisis. And the resources-boom-caused high exchange rate has hit Queensland's tourism industry as Australians take advantage of cheaper overseas holidays.

The broader lesson is that, for all the talk of a two-speed economy, the six states form one, highly integrated national economy. Income that arises in one state easily flows across state borders as it's spent.

Economists call this "the circular flow of income", but you can say what goes around comes around.