Saturday, December 10, 2016
Oh, no! Another negative quarter will see the economy lapse into "technical" recession. Technically true, but quite unlikely - as almost all the money market economists had the honesty to admit.
If you're more practical than technical, and you live in Sydney or Melbourne, the best way to judge whether recession looms is to look out the window.
Bearing in mind that anyone under 25 has never seen a severe recession, and that anyone under about 40 probably wasn't paying much attention in 1991, let me give you a hint: they don't look anything like what you see around you.
What the self-styled experts on "technical recessions" don't tell you - perhaps because they don't know - is that employment is falling and unemployment climbing rapidly during actual recessions and even before the "technical recession" is proclaimed by a slavering media.
Think about it: rapidly climbing unemployment is the main reason those of us who've lived through a few recessions don't toss the word around lightly.
So what do we know about the employment story in Sydney and Melbourne?
According to the Bureau of Statistics monthly survey of the labour force, over the year to October total employment in NSW rose by 39,000, while the rate of unemployment fell by 0.6 percentage points to 4.9 per cent (although this was fully offset by a fall in the rate of participation in the labour force).
Not all that wonderful, but a long way from the precursor to a recession.
As for Victoria, it's performance is pretty good: total employment up by 109,000 over the year to October, with the unemployment rate down 0.3 percentage points to 5.7 per cent, even while the participation rate rose by 0.9 percentage points.
If you live in Perth, however, looking out your window would convince you the West Australian economy is in something like a recession.
Over just the six months to October, employment has fallen by 19,000 (1.4 per cent) while the unemployment rate rose 0.7 points to 6.4 per cent and the participation rate fell by 0.9 points.
Get it? If we were in or near recession, you wouldn't need the technical brigade to tell you.
The other point is that most of the weakness in the nationwide figures comes from the very tough times in the 15 per cent of the national economy represented by WA - which, of course, is bearing the brunt of the massive fall-off in mining and natural gas construction activity.
NSW and Victoria aren't doing too badly.
But why the sudden sharp contraction in the national figures? The bureau's national accounts for the September quarter show that the 0.5 per cent contraction lowered the economy's annual rate of growth to 1.8 per cent, down from 3.1 per cent over the year to June.
Michael Blythe, chief economist for the Commonwealth Bank, offers the most enlightening metaphor, saying the economy had just hit a pothole.
Paul Bloxham, his opposite number at the HSBC Bank, says the fall reflected an (unusual) accumulation of various one-off factors.
"First, export growth was weak, as coal production was disrupted by a roof collapse at a key mine, and various other factors," he says.
"Second, residential construction fell in the quarter, which the statistics bureau noted was due to inclement weather.
"Third, there was a sharp fall in public investment spending, which followed a sharp rise in the June quarter.
"Finally, mining investment continued to fall as projects are being completed."
It's clear the first three of these are just temporary setbacks. "Export growth is expected to bounce back strongly in coming quarters, given that there is substantial capacity still to come on line in the resources sector, particularly liquid natural gas export facilities," Bloxham says.
Exports of services rose in the September quarter and are expected to continue to rise, supported by demand from Asia.
In home building, there's a substantial pipeline of work yet to be done on new apartment projects, which should keep housing construction growing in coming quarters, although this will come to an end after that.
The sharp fall in public investment is unlikely to be repeated next quarter. Capital spending by the public sector is, to be technical, "lumpy" - it jumps around from quarter to quarter. In this case the figures were distorted by the privatisation of a big asset.
This is the 12th quarter in a row that business investment spending has fallen because of the end of the mining construction boom.
Since December quarter 2012, mining investment's share of gross domestic product has fallen from its peak of 9.4 per cent to 3.4 per cent.
This says we can't be far from the bottom, which is good news. Bloxham says mining investment should level out - and thus stop making negative contributions to growth - around the middle of next year.
Anything's possible, but a second negative quarter seems unlikely.
Even so, when you look behind all the one-offs, you do see signs in these accounts that the economy may not be growing quite as strongly as we formerly thought.
Growth in consumer spending has been on the weak side for two quarters in a row, even though the bureau's latest stab at the household saving ratio (as a proportion of household disposable income) says it's down to 6.3 per cent, quite a bit lower than we thought. Low growth in wage rates is taking its toll.
In November, the Reserve Bank's forecast showed the economy continuing to grow by about 3 per cent next year, strengthening to about 3.5 per cent by the end of 2018.
My guess is, when we see the revised forecast in February, it will be down a bit on that, though not by a lot.