Showing posts with label disasters. Show all posts
Showing posts with label disasters. Show all posts

Saturday, June 4, 2011

GDP hot air gives Hockey hiccups

See how long it takes you to figure this one out: if something falls by 50 per cent, then rises by 100 per cent, where is it? Answer: just back where it started.

If you had to think about it you need to be careful what conclusions you draw from this week's national accounts showing the economy - real gross domestic product - contracted by 1.2 per cent in the March quarter.

Thanks to economists' obsession with growth, we focus almost exclusively on the percentage change in GDP and its components from one quarter to the next, but if you don't have a good feel for how percentage changes work you risk bamboozling yourself.

(Speaking of which, remember that, though the percentage increase needed to get you back to par is always bigger than the original fall, the smaller that fall the less spectacular the subsequent rebound.)

Now try this reaction to the national accounts from Joe Hockey: ''If the mining boom has a cough the Australian economy can suffer pneumonia. The economy is increasingly reliant on the mining boom.''

It's a snappy soundbite for the telly, but it's nonsense. Indeed, it's roughly the opposite of what the national accounts are telling us.

For a start, the problem during the March quarter wasn't the mining boom, it was the weather. Is our economy heavily reliant on the weather? Our farmers are, but the rest of the economy isn't (well, not until we're finally screwed by climate change).

For another thing, what happened last quarter wasn't a cough that shows we've got pneumonia, it was a hiccup that isn't worth worrying about. Remember, 98.8 per cent of the economy was still there in the March quarter.

All that happened was that flooding and cyclones temporarily disrupted our production of coal, iron ore, agriculture and tourism. The disruption to mining in particular led to a decline of 27 per cent in the volume of coal exports during the quarter, causing the volume of all exports to fall by 8.7 per cent.

But today, two months after the end of the March quarter, we know the bad weather has stopped, most mines are working again, farmers have replanted and the rebuilding of houses, roads and other infrastructure has begun. Export volumes recovered in the month of March and further in April.

The natural disasters are estimated to have subtracted 1.7 percentage points from real GDP growth during the quarter. But Wayne Swan is expecting a rebound of about 1 percentage point in the present quarter and a further rebound in the September quarter. This is why Hockey's pneumonia is no more than a hiccup.

The rebound will come for three reasons: production will return to normal; some firms will work overtime to catch up on lost production and there will be much rebuilding and purchasing of new equipment.

Note that, thanks to our obsession with rates of quarterly change, part of the rebound is simply arithmetic. The government estimates the various natural disasters subtracted $6.2 billion from the real value of production in the March quarter, but will subtract only $3.1 billion in the June quarter. If so, this reduction in a negative represents a positive contribution to the growth in real GDP in the June quarter.

The point is, when the economy contracts in a quarter, you have to investigate the causes before you decide the economy has pneumonia and needs to be hospitalised. In this case, the causes are transitory - and self-correcting - rather than lasting.

Another clue is that the economy suffered a weather-caused shock to its supply side (production of goods and services) rather than weakness in its demand side (spending on goods and services).

A weakness in demand is more likely to be deeper-seated and longer-lasting, requiring the economy's demand managers - the government and the Reserve Bank - to adjust the settings of the instruments they use to influence the strength of demand: respectively, fiscal policy (the budget) and monetary policy (interest rates).

What makes Hockey's talk of pneumonia so opposite to the truth is, when you look past the temporary supply problem you see demand growth is quite healthy. Consumer spending grew by 0.6 per cent in the March quarter (and by 3.4 per cent over the year to March), with government spending on consumption items growing by 1.4 per cent (4.6 per cent for the year).

Turning to investment spending, spending on new or altered housing grew by 4.6 per cent (annual, 6.6 per cent) and business investment in new equipment and structures grew by 2.9 per cent (annual, 4.5 per cent).

That leaves public sector investment spending, which fell by 0.7 per cent (annual, minus 6 per cent) as the fiscal stimulus continued to be withdrawn. (Overall, the withdrawal of stimulus trimmed 0.4 percentage points from GDP growth during the quarter.)

Adding this up, ''domestic final demand'' grew by a whopping 1.3 per cent during the quarter and by 3.3 per cent over the year. Allowing for a fall in the level of business inventories (much of it probably caused by the natural disasters), ''gross national expenditure'' - which is domestic demand proper - grew by a healthy 0.8 per cent during the quarter and by 3.1 per cent over the year.

This healthy growth ain't surprising since total employment grew by almost 50,000 during the quarter.

As the secretary to the Treasury, Martin Parkinson, pointed out this week, though the mining sector gets most of the headlines, it accounts for only about 8 per cent of GDP (and an even smaller proportion of total employment). So that leaves 92 per cent of the economy that's not mining but is doing fine.

It's true that, of late, much of the growth in the economy has been coming, directly and indirectly, from mining. But it's rare for all parts of the economy to be growing at the same rate, so it's common for one sector - often it's been housing - to account for much of the growth in a particular period. That doesn't mean we'd catch pneumonia were that sector to falter.

Consider this: if the sky-high prices we're getting for coal and iron ore were to suddenly collapse, that would be a blow, but it would also bring about changes that encouraged other sectors to grow faster: the high exchange rate would fall, the Reserve Bank would cut interest rates and the budget wouldn't be as contractionary, taking longer to return to surplus.


Monday, January 31, 2011

Floods' economic pain greatly exaggerated

Most of us are back at work, but the silly season won't be over until we get the Queensland floods into perspective. They are a great human tragedy, but they're not such a big deal for the economy.

It's not surprising the public has been so excited about such amazing scenes and so much loss of life and property. Nor is it surprising the media devoted so much coverage to the floods when, with most of us at the beach, there's been so little other news.

It's not even surprising the Gillard government has been beating up the story, making it out to be the biggest thing since the global financial crisis. At one level this is just the pollies doing their instinctive I-feel-your-pain routine. They could seem heartless if they tried telling people things weren't as bad as they seemed.

At another level it's easy to see Julia Gillard trying to gain the same boost to her popularity as Anna Bligh. She'd be well aware of all the seats Labor lost in Queensland at the election in August. It's an almost inevitable assumption by the punters and the media that if an event is huge in human and media terms it must be just as big in its effect on the economy. When the punters tire of seeing footage of people on roofs, you "take the story forward" by finding some expert who'll agree it also spells disaster for the economy.

The wise and much-loved econocrat Austin Holmes used to say that one of the most important skills an economist needed was "a sense of the relative magnitudes" - the ability to see whether something was big enough to be worth worrying about.

That sense has been absent from the comments of those business and academic economists on duty over the silly season, happily supplying the media's demand for comments confirming the immensity of the floods' economic and budgetary implications.

With the revelation last week of the econocrats' estimates of the likely magnitudes, it's clear the figures supplied by business economists were way too high. And the economists' furious debate over how the budgetary cost of the rebuilding effort should be financed is now revealed as utterly out of proportion to the modest sums involved.

Of course, you still wouldn't have twigged to this had you focused on the government's rhetoric rather than its figures. In Gillard's speech on the budgetary costs and Wayne Swan's speech on the economic impact both were busily exaggerating the size of the crisis, even while revealing how small it really was.

Gillard said it was "the most expensive disaster in Australia's history" and that the "cost to the economy is enormous". The government's task, she kept repeating, was to "rebuild Queensland".

Swan repeated that "this is likely to end up being the most costly disaster in Australian history", which was "going to cost Australia dearly" and involves a "massive reconstruction effort". The closest he got to the truth was his observation that "the economic questions pale into insignificance next to the human cost of what we've seen".

If this is the most expensive natural disaster in Australian history, all it proves is the cost of earlier disasters was negligible. If you can "rebuild Queensland" for just $5.6 billion, it must be a pretty tin-pot place.

If $5.6 billion seems a lot, consider some "relative magnitudes": the economy's annual production of goods and services (gross domestic product) totals $1400 billion, and the budget's annual revenue collections total $314 billion.

Note that, though no one's thought it worthy of mention, the $5.6 billion in spending will be spread over at least three financial years, making it that much easier to fund.

We know that more than a third of the $5.6 billion will be paid out in the present financial year with, presumably, most of the rest paid in 2011-12. So just how the flood reconstruction spending could threaten the budget's promised return to surplus in 2012-13 is something no one has explained.

And if $5.6 billion isn't all that significant in the scheme of things, how much less significant is the $1.8 billion to be raised from the tax levy? The fuss economists have been making about it tells us more about their hang-ups over taxation than their powers of economic analysis.

And how they can keep a straight face while claiming it could have a significant effect on consumer spending (well over $700 billion a year) is beyond me.

Turning from the budget to the economy, Treasury's estimate is that the floods will reduce gross domestic product by about 0.5 percentage points, with the effect concentrated in the March quarter.

Thereafter, however, the rebuilding effort - private as well as public - will add to GDP and probably largely offset the initial dip. So the floods will do more to change the profile of growth over the next year or two than to reduce the level it reaches.

Most of the temporary loss of production will be incurred by the Bowen Basin coal miners. But, though it won't show up directly in GDP, their revenue losses will be offset to some extent by the higher prices they'll be getting as a consequence of the global market's reaction to the disruption to supply.

And despite all the fuss the media have been making over higher fruit and vegetable prices, Treasury's best guess is that this will cause a spike of just 0.25 percentage points in the consumer price index for the March quarter, with prices falling back in subsequent quarters.

So the floods do precious little to change the previous reality that, with unemployment down to 5 per cent and a mining investment boom on the way, the economy is close to its capacity constraint and will soon need to be restrained by higher interest rates.