The March quarter national accounts confirmed the economy accelerating to an above trend growth pace in the first quarter of 2014. GDP rising 3.5 per cent is a sign of the robustness of the economy in the past six months in particular (annualised GDP in last two quarters was 4.0 per cent) and it is clear that, in normal circumstances, the RBA would be looking to normalise (hike) interest rates from the current record low 2.5 per cent.
Things are not normal.
Almost half of the 3.5 per cent GDP growth in the past year has been due to China buying the raw materials that are rolling off conveyor belts 24 hours a day, 7 days a week.
Not that there is anything wrong with that. Indeed, it is a great thing that the economy is being supported by an external benefactor who is willing to buy a lot of those materials and pay a high price for them. While the strength in China lasts, the Australian economy will continue to grow, earn income and flourish.
The shocking aspect of the national accounts was a 0.3 per cent fall in gross national expenditure. Those in the community not feeling warm and fuzzy about the above trend growth now being recorded are exposed to parts of the domestic economy and are not those linked to the export sector.
This is why the RBA is not hiking interest rates – the non-export parts of the economy are soggy. To be sure, dwelling investment and household consumption growth were solid or strong into early 2014, but in recent months, dwelling approvals for housing have fallen sharply and the most recent retail trade data has been weak.
It is lovely to see GDP growth at 3 per cent and more, but it is important to acknowledge where that growth is sourced. An occasional boost from exports, or government demand, or housing construction or any other component is fine if other parts of the economy or soft or indeed, going backwards.
At the moment, it is exports, mainly to China, that is the driver of growth while mining investment, government demand and inventories are weak.
It is more likely than not that the surge in exports to China will continue. The concern is the monopsony-like environment via Australia’s dependence on China which leaves it exposed to swings in Chinese growth and macroeconomic policy settings.
For now, the economy is looking good. The test as to whether this continues will be in three months when we see the June quarter national accounts and whether or not the recent dip in housing starts and retail spending undermines growth and even more importantly whether Chinese demand for mining output remains strong enough to support bottom line GDP growth.