The Australian economy is like cricketer Shane Watson – looks pretty good most of the time, occasionally inspires with a terrific performance, but then falls short of what is required when the going gets tough. The performance is not so bad as to give up with a downgrade or capitulation exit, but it is frustrating nonetheless to watch month after month generally disappointing results.
The GDP result today locked in two and a quarter years where real growth has been below trend. Real GDP rose 2.5 per cent in the year to the December quarter 2014 meaning that for the last nine quarters, annual GDP growth has been stuck between 1.9 and 3.0 per cent with an average growth rate of a miserable 2.4 per cent. The long run trend growth rate for Australia is around 3.2 per cent which means that the economy could have grown almost 1 percentage point faster for the last two years without there being any threat of rising inflation.
I am not sure if the RBA knows that but I will try to tell them next week.
In other words, there is a large and growing output gap which is showing up in a rising unemployment rate and very low inflation.
Let’s look at some other aspects of the GDP data:
Annualised growth in the last two quarters was just 1.8 per cent and if March quarter GDP growth is 0.5 per cent, annual growth will slip below 2 per cent.
For a bit more context, average GDP growth since the onset of the GFC in the middle of 2008 has been 2.5 per cent which means there are now almost seven years of sub-trend growth. No wonder the unemployment rate has gone from 4 per cent to 6.4 per cent and inflation is a dead duck.
If we view trend GDP growth as 0.8 per cent per quarter (ie 3.2 per cent annual), there has been only one quarter in the past ten that has exceeded 0.7 per cent. Crook, in other words.
To be sure, interest rates are low and the massive depreciation of the Australian dollar over the last two years will help underpin growth but there must be serious questions about whether the stimulus is enough. It is a bit like a patient on a course of medicine. One tablet wont fix things – you need to take the full course to get better. Alas, the RBA have delivered the medicine in fits and starts but yesterday ‘forget’ to deliver the next dose.
Perversely, many of the policy back-flips from the government and Senate blocking of budget measures also mean that the restrictive nature of the budget is not as severe as feared. This may help. Policy is tilting towards a faster pace of growth, but it is operating in unfavourable circumstances of weak commodity prices and some less than robust economic activity in the global economy.
Suffice to say, a further interest rate cut is needed as is a more relaxed approach to fiscal policy when the budget is delivered in May.